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In this episode, Rob chats with Michele and Mathias Hansen, the married co-founders of Geocodio.
We talk about bootstrapping into a commoditized space and how they’ve grown their SaaS app from a side project to full-time over the past 6.5 years.
The topics we cover
[01:38] What is Geocodio?
[10:29] Innovating in a commoditized market
[16:07] How they defined their product roadmap
[18:06] Launching a HIPAA compliant enterprise pricing tier
Links from the show
- Show HN: Ridiculously cheap bulk geocoding
- Geocodio | Website
- Geocodio | Website
- Michele Hansen | Twitter
- Mathias Hansen | Twitter
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Rob: Welcome to this week’s episode of Startups for the Rest of Us. I’m your host, Rob Walling. This week, I talk with Michele and Mathias Hansen. They are the married co-founders of Geocodio, which is hassle-free geocoding. We’re going to talk about bootstrapping into a commoditized space and how they’ve grown their SaaS app, first on the side and later both going full-time, over the past 6 ½ years. It’s a great conversation. Before I dive into that, I wanted to make a quick mention. Brad Touesnard contacted me, he is @bradt on Twitter. He said, “Hey, I’m in Atlantic Canada and COVID is not terrible up here so I’m thinking of gathering just a few people up for an in-person tech founder MicroConf founder type meetup in the late spring or early summer.” If you are a tech founder in Atlantic Canada, DM him on Twitter, @bradt. Another reminder that today is the last day to get your nominations in for the SaaS Podcast Awards, that’s saaspodcastawards.com. We are trying to recognize the bootstrapped and mostly bootstrapped SaaS founders that are getting on the mic and educating us every week, helping share their story and their inspirations. Please head to saaspodcastawards.com, nominate your favorites. With that, let’s dive into my conversation with Michele and Mathias Hansen. Michele and Mathias, thank you so much for joining me in the show.
Michele: Thank you for having us. Mathias: Thank you.
Rob: You are the co-founders of Geocodio. Your h1 reads, hassle-free geocoding, straightforward and easy-to-use geocoding, reverse geocoding, and data matching for US and Canadian addresses. For folks who don’t know, you can enter an address or you can enter a latitude-longitude and it’ll give you back the opposite one. I’m guessing that’s probably how the service started way back in the day but at this point, you guys have added integrations to where you correct misspellings, you have US and Canadian census data, Congressional districts, state legislative districts, school districts, time zones, all that kind of stuff. I’m imagining that didn’t come on day one and you’ve built that all out over the years.
Michele: Yeah, that’s been added slowly. How we often describe it is that a computer doesn’t understand an address, it only understands the coordinates or geocodes. What we do at a very basic level is converting an address into coordinates so a computer can understand it, and coordinates into an address so a human can understand it. Our niche in the market is there’s a lot of data that is only unlocked by having the coordinates. As you mentioned time zones for example, you can only get that data if you have the coordinates. You may be using coordinates to make a map online for example, but you may not even care about maps and you may just want to know the time zone for a particular location.
Rob: That makes a lot of sense. A service like Geocodio is something that my co-founder Derrick and I when we were running Drip, we had an author who was going to go on a book tour and he was going to go to San Francisco, LA, and these various cities. He asked us, is there a way I can go into Drip and query which of my email subscribers are within 60 miles or 100-mile radius of San Francisco? Of course we would have needed either their address, or you can obviously turn an IP address into a “location”, not exact but it would probably be good enough for this purpose. We did actually look into services like this. We never want to build in that feature out but that gives folks—if you’re listening to this—one particular use case of why you may want to use a geocoding service. You guys launched it 6 ½ years ago in January of 2014 as a side project essentially on Hacker News is what I see. My assistant producer found the original Hacker News thread which was generally positive. I mean, sometimes those things go really sideways. There was a comment or two—because you were saying, hey, Geocodio, it’s aimed at developers and it’s a less expensive way to do this. Someone came in, little bit know-it-all comment of like, oh, if you use—I don’t remember what the service was—it ‘ll be this inexpensive blah-blah-blah. Pretty quickly, both of you chimed in with factual data and references of like, no, actually, we are less expensive, we don’t have restrictions on your data and you don’t have to use their maps, you can do it as you want. I thought it was a pretty elegant interaction. I’m curious, did you guys come away from that launch feeling pretty good about the reception? Mathias: There’s definitely a lot of constructive feedback in that thread but also as you said, a lot of positive comments. I think the biggest takeaway we had was, woah, we aren’t really the only people with this problem that we wanted to get solved. We didn’t realize how big the potential market would be. This really showed us that there is a potential here.
Michele: I remember we got hundreds of emails from people after that thread. I remember that day just being absolutely wild. I think that’s what everybody does when you put something in Hacker News, you send it to your friends and you’re like, hey, upvote this. Then if it gets five upvotes and you get 10 people visiting your product, you feel pretty good about it. Seeing that sit on the front page all day, it was just unbelievable. We got so much feedback from people about everything from things they wish we did to complaints about our competitors and how they were so glad to see something like this. We even had the M&A team from a major product reach out to us because they were unhappy with their geocoding. Of course, when we launched our product, it wasn’t that great. Mathias: That’s true. Full context, it was a really, really terrible product when we launched it. It was barely something we could actually use ourselves. We only use it ourselves because we just couldn’t afford anything else. It was not a very good product. The data was not high quality, high equity, things like that. We’ve had a long, long way since then but it was just so cool to see that despite a crappy prototype, there is still so much interest in this.
Michele: As you said Rob, some of those commenters pointed out that with geocoding, the accuracy of the locations is important but what really differentiates us from many other services is that people can use the data without restrictions. They’re allowed to store it in their database. There aren’t these overly cumbersome caching limitations and requirements about using it with a particular brand of map, public phasing only, more expensive pricing, if it’s private phasing only, and all of these things. Us developers ourselves, we’re like that’s annoying and nobody wants to deal with that. We don’t want to deal with that. That perspective of being the customers ourselves is something that we have carried with us the entire time.
Rob: That’s a good perspective. Obviously, if you launched into a space like that that is crowded and is commoditized, to hear that there’s that much of a reception, that you really touched on a pain point is such a good way to get out of the gate. I’m actually surprised to read then—again, I have notes from my assistant producer—that you only made $31 in your first month at the gate. I would expect with a reception like that that you would have had more people using it. Mathias: No, exactly. It was a very success in our heads actually. Our expectations were so low that our success criteria was basically if we can pay for the virtual service to run the servers, if we can pay for that, that’s a success, that’s the ideal. The fact that we made around $31 was enough to cover our $5 a month DigitalOcean instances and there was even testing. It also goes to show being on Hacker News in the frontpage for 24 hours doesn’t mean you’re on overnight success. We had a lot of work in front of us but we had so much fire power, so much enthusiasm to continue working on this. We knew that there was this something here that we can continue trading on.
Michele: Right. We were so surprised that anyone wanted to pay us that when we launched it, we had integrated Stripe. We said we would charge on the first of the following month for pay-as-you-go usage so people can just pay for whatever they needed and we would just charge them once a month. We’d integrated Stripe from the beginning but we were so surprised that anyone wanted to pay us that actually, February 1st came and we looked at each other like, oh, we didn’t actually write any of the code to charge people. We were genuinely shocked that people wanted to pay us.
Rob: I’ve been there with not having billing code, that’s such a great MVP way to do it. Four years later then, the two of you in 2018 both went full-time on the product and were able to financially afford to do that. You mentioned back in 2018 that you have passed $1 million in all-time revenue. That would have been about 4–4 ½ years span. Michele, recently on your podcast Software Social, you mentioned that top-line revenue growth to July of this year was 59% growth compared to last year. Obviously, really, really solid growth is happening. To give folks an idea of scale, you have thousands of customers and I was looking at your homepage. I’ve seen big, big customers here, Amazon, Deloitte, Cushman & Wakefield, Comcast, all that kind of stuff. So fascinating that in a space, I have already said it once but I think commoditized is the word that comes to mind when I think of geocoding data. I don’t necessarily care if I were looking for geocoding data when we worked for Drip. I cared that the company stayed in business, and that the data was accurate, and the price was reasonable, and API was easy to work with, but that was it. I didn’t care about, brand, I didn’t care about a lot of other things that one might care about when searching for a product. Given that geocoding is a volume business and it is harder to differentiate. It does not necessarily lend itself to a defensible mode. I think you guys have mentioned that you’ve done a lot of innovation. You can correct me if I’m wrong, but you’ve done most of your innovation on pricing and integrations. You want to talk a little about that?
Michele: Yeah, we sometimes say that geocoding is sort of selling wood into the software market. Everybody needs it, which creates this really wide market. Our customers are one person companies and freelance developers to huge companies and pretty much every industry. In that commodity market with limited opportunity for most, no opportunity for pricing power, it sounds like a great business to be in, doesn’t it? Where we have kind of carved out our space is really focusing on making it easy for people and that’s where the data integrations come into play where we had past experiences here, for example, if you needed to know someone’s congressional district. Let’s say that you had a Drip customer that was a charity that wanted their supporters to contact Congress about an issue that is important to them. Before Geocodio, in order to figure out which congressperson each volunteer or supporter had, first, you’d have to hit one API to get the coordinates, then you have to hit another one to get the congressional district, and then you have to hit another one to get their actual contact information. You may even have to hit another one to first get the Congressperson’s name, and then another one to get their contact email or whatever their contact form link is, and then you go off and integrate that. You’re hitting three or four different places there and that creates a lot of complications in terms of just managing the data, gathering all of that data. It’s all coming to you in different formats. They may have different terms, different pricing, different restrictions on storing the data, on using the data. Where we have found our success is in trying to eliminate steps in the process for people and making it easy to get lots of related data that’s down the line all in one place. You only have to hit one API to not only parse and standardize the addresses, but you can also add the average household income for an area, or the school districts, or other types of data that you might need for everything from real estate to insurance to simply showing a map.
Rob: That makes a lot of sense and it sounds like it’s much more useful for a customer who would want that information. I’m curious, do they have to pay more for access to it? Because I’m imagining do you have to pay for that data or are you actually going out and actively scraping to get that data? Because it seems like if there’s a cost to you, that you would almost have to pass that onto your customer. I’m thinking like feature gating, right? It’s like if you just want addresses, it’s X amount per month, but if you want congressional districts, is it an add or per check or are you able to offer it just as a one big bundle. Mathias: Yes. For additional data points, we do indeed charge additionally for those. And the biggest thing is additional data storage costs and processing costs.
Michele: With the data, one of the most important parts of our service, the cornerstones is the lack of restrictions on how people use the data. We don’t want to be standing over our customers shoulders telling them how they can and can’t use the data. What that means is that we only integrate publicly available data sources. We’ve actually had quite a few people over the years come to us wanting us to resell their data and we simply have to decline those because one of the most important pieces of our service is that you can do whatever you want with the data and that’s one of the great things about using publicly available data. Now, it may seem counterintuitive that you can charge for that, but a lot of that data is in extremely difficult to use formats that are only available if you have other sort of doorways to the data in addition to the coordinates. How we charge for that, the basic level is that we call everything a look up. For example, one address to coordinate conversion is a lookup. But then if you want to add the time zone, that’s an additional lookup. If you want to add the census identifier. For example, in your Drip example from earlier where the customer wanted to know who was in or around San Francisco and who was around Minneapolis, they could add the census identifiers, which that category of data append at something called the Metropolitan Statistical Area, which is basically the broader metro area and does that radius thing for you. All of those things count as an additional lookup. For example, if someone had a hundred addresses and they wanted five different data appends for them, that will actually increase the number of lookups, that’s actually 600 lookups.
Rob: Which is nice because you’re adding value to your customers, but you also are charging for that value. You have now differentiated yourself from other geocoding services while also essentially charging more, which is a great goal of every SaaS.
Michele: Yeah and the great thing about it is, yes, we can charge for that and also we can charge nothing for it. We have a freemium model and that means that if students or people who simply don’t have a lot of data that they’re working with, they can get that data that they might need as long as they only have 500 addresses or whatnot, they don’t actually have to pay for it. But if it’s a huge company that needs, let’s say for example household income and demographics and other pieces of data, about 300 million addresses in the country, then they will be paying a lot more.
Rob: I feel like I know the answer to this next question, but I want to ask it anyway. How did you know to do all these integrations? What prompted you to integrate time zones, school districts, state legislative congressional, legislative. Were these customer requests, or was there some other way that you figured out your product roadmap?
Michele: Yeah, we talked to our customers.
Rob: Were you proactive by going out to them? Was it a mix of people writing in requests or were you also reaching out saying what we should build next?
Michele: It was a combination. You mentioned that first hacker news thread. There is a ton of feedback on that, some of it negative, mostly positive, and we got tons of emails from people saying hey, it would be awesome if you guys could do this, or you could do that? That kind of planted the seed of talking to people and the value of talking to customers. We were also learning about the space ourselves. Neither one of us did our undergrad in geographic information systems. We very much come at this from a developer’s perspective rather than a geographers perspective. When our customers came to us early on with asks, we would always ask them oh, why do you need that? Because we genuinely didn’t know, and we also had experiences from our own work showing us the value of reducing the number of API calls or places you have to get data from. I think as I grew as a product manager myself and as we worked more in the business, really started deeply talking to customers, not just waiting for them to come to us with requests, but sitting down with them, understanding their complete process, knowing every single point along the way and what those frustrations were, and where they were spending a lot of time or a lot of money, or they had to use a vendor and they didn’t like them for some reason. All of those things contributed to an ever evolving roadmap that is informed by our customers.
Rob: Is that how you decided to build your HIPAA compliant tier or you’re pricing your HIPAA product, I guess. I bring it up because on your software social podcast, you had a really good episode talking about kind of telling the story of how you built it and then I believe no one signed up for it. But the costs of keeping it running were relatively substantial, not inconsequential, I’ll say and you kind of mothballed it for a while and then suddenly a bunch of people out of nowhere wanted to to use it. Mathias: Yeah, exactly, we kept hearing over and over again is your service HIPAA compliant? Can we use this for patient data and things like that? I remember seeing it for the first time. I was like, I don’t even know what HIPAA means, or covers, or anything like that. After hearing this one too many times and also Michele’s doing a lot of custom interviews and hearing this over and over again from customers, we decided to sit down and build out this HIPAA product. It’s probably the biggest undertaking at that time. We had to really rethink our whole product from scratch and make sure everything was secure to much higher standards than we originally built geocodio for. We really pour a lot of time and money into this and we launch it and then poof, nothing. Exactly what you fear and also kind of what you expect sometimes. Indeed since we had to set this up completely separately with separate infrastructure, there’s a lot of upfront cost to us, not just the development costs, but also the infrastructure costs of keeping this running. We basically did not have a single sign up for I don’t even know how long, and we ended up almost completely shutting down this product. But for some reason, we somehow decided to keep it alive, probably just because of all the effort we put into this. It was hard to kill it completely so we decided to keep it on for a little bit longer. Seemingly out of nowhere, we have been seeing a lot of growth on this product this year in particular, really happy that we kept it alive and we actually do a lot of things now to give it a lot of love and attention that it deserves at this point.
Michele: That launch was so hard. Mathias: Yeah.
Michele: The number one rule of bootstrapping is to always make money. We don’t have the luxury of launching something and running in the red for six months or a year. I think it was maybe only a month after we launched and we learned the hard way that the sales cycle is so much longer when you’re dealing with companies that have robust legal departments, which is the case for pretty much any organization dealing with sensitive data like that. We basically had to shut off the pay as you go version of the products, and only it sort of kept it alive on our unlimited tier, which basically we only incur the cost when we actually have a customer. We had the landing page up only for I don’t know how many months. Our sole marketing and sales channel is SEO, we don’t do any outbound sales. We continued working on the landing page a little bit. I think we were a little bit dispirited, quite frankly, though for a while. And then eventually we very, very slowly started getting customers. But I don’t think we actually really believed in it being a significant part of our business or the capability to be a significant part of our business until maybe the middle of last year and then this year really took off. Mathias: I think the big gotcha with launching that product, something we perhaps hadn’t fully understood until after we launched was Geocodio was originally a super classic, sort of low touch SaaS product, self sign up and stuff like that as Michele I mentioned we jumped into all this stuff with long sales cycles. Eventually things started picking up and we suddenly had to do enterprise sales, super high touch, which is, first of all, it’s not very scalable for us to go through the process. It’s not something that was something we were used to or have a little experience with and things like that. That was definitely an uphill battle to start with.
Michele: Yeah. For an example, earlier this year or this summer, we signed a Fortune 100 customer for that product and I started talking to them in May of last year.
Rob: That’s the thing that so many founders don’t realize is the moment you start talking procurement or POs and manual invoicing in terms of net 15 or net 30, you are talking months and months of sales cycle and you’re talking you should be charging between 10 and 100 times what you charge everyone else purely to put up with the hassle or the time and potentially legal costs because they often want custom terms that you have to sign and that instantly becomes this enterprise tier that should be way, way, way more expensive. We talk about this a lot in TinySeed in the first month or two. Most SaaS apps from people who don’t really have this experience dealing with these larger companies. Most assets are underpriced and so if you have tiers that are in, as a random app, if you have $50, $200, to $300 as most of your tiers, if a Fortune 500 or Fortune 1000 company comes in, there are going to put you through the procurement wringer. You should be charging between $30,000-$100,000 a year. It really needs to be there and you should be often charging upfront. They want to pay annual, which is a great cash influx for a bootstrapped company. In addition, a lot of the companies I see that are getting really strong traction, they have what I call this dual funnel. A low touch funnel is much like probably what geocodio was when you first launched it where you come to this low price point, people can sign up with a credit card. You don’t have to talk to them and they just go. The high touch funnel, of course, is your HIPAA tier, but having both of those is like a superpower with SaaS growth because you can get a lot of people using it on the low end and you can get that constant influx and constant kind of, I’d say slower growth perhaps if we’re landing lower priced people. But when the enterprises come through, that’s when you see the really big months of growth hit because you’re again, you should be signing this $20,000 to $30,000 to $100,000 year contract and that gives you this big bump. But if you rely solely on the large ones, of course, there are great businesses built on the enterprise sales. If you rely solely on them, then you tend to have a lot of time invested doing stuff that most of us don’t want to do. I’ll say as makers, as founders, as customer researchers, that’s not our strong suit. It’s not necessarily what we want to be doing is spending time talking to procurement and legal anyway. Those two things add together to give really nice growth. I want to come back to something that Mathias said. He said, out of nowhere, all of a sudden, you started getting these HIPAA customers. Where are they coming from? Because nobody comes out of nowhere, is it just as simple as Google search and search engines or have you been doing other marketing to promote Geocodio?
Michele: We basically don’t do a lot of other marketing. We occasionally sponsor conferences, but mostly those are just conferences that our friends run. It’s very SEO driven. To what you were saying about low touch and high SaaS in combination, it’s been really fascinating for us to see how those interplay and how they feed one another. We will very often find that somebody on a team within a large company will be googling for geocoding or whatnot. They start using us on the free tier or they get their bosses free card and they do a little bit of usage and then anywhere from a day to a month to a year later, they might say hey, we want to get an annual contract. What’s so amazing, especially about having freemium SaaS is that they can try out the product and see if it’s a fit for them before you ever even talk to them. You don’t have to spend all of this time with a huge sales team, doing demos, doing cold calling, cold emailing, all those things. We don’t do any of that because customers can figure out for themselves whether the product is right for them and then they simply tell us when they want to switch to annual. I also find that doing those negotiations where they always want to customize things in the contracts, and there are sometimes difficult scenarios in those negotiations. But I find that having a point of contact at those companies that have already been using our product, is already totally sold on it, and is a huge advocate for the product within the company can make those conversations with legal or with compliance or whatnot a lot easier because they’re doing some of that negotiation for us. They’re advocating for us and time and time again, that’s helpful. It’s always so fascinating to me, seeing the interplay of them. In Slack, we have a feed whenever someone cancels or deletes their account and wants to talk about our product as if someone has an organizational account, they have to delete their old account to be re-added because we never thought about that from the beginning. It’s so interesting to see the comments in that and so often it’s oh, my company got an account, so I’m just deleting this one so I can re-associate it.
Rob: That’s fascinating. This really lines up with what several of the B2B SaaS companies that are growing like a B2C companies, they have superpower growth are companies like Slack where they have the bottom up approach. That’s been a big thing where a small team of three or four starts using it and then another team of ten and then a team of 20 and suddenly the IT department’s like wait, we need single sign on. We want to manage it. We want an annual contract. We want a paid version, and they want to bring it under the corporate umbrella. That’s in essence what is working for them. A big part of that is a really inexpensive or a free tier, frankly, because that allows people to use it. Once they’re in it, you have the champion, much like you’re saying. I was looking at an app, I have no idea what it was but it was a SaaS app. They had a free tier and then their pricing started at a thousand dollars a month and up. It was like they know their customers because they know that people want to try for free, get used to it. If it’s valuable, it was worth $1000 a month. It was some type of enterprise type tool that, again, I don’t recall what it was, but that’s when you know that someone has thought it through and not just said well, I’m going to have free. Isn’t it usual that you do like a $50, $100, and $200 dollar plan? It’s kind of the basics. Someone has really refined and honed it and that is an obvious advantage both for companies like Slack and even for bootstrapped assets like yourself. Mathias: Yeah, I say from a pure economics and finance perspective, I think a lot of things we do will be a lot simpler, but it’s a bunch of plans we can so predict MRR things like that. Having this pay as you go tier means that basically the revenue from each customer can vary like crazy depending on their usage. But I feel like that’s also a cornerstone of the foundational part of the company and how we started out. We really, truly believe that anybody should be able to afford this. One of the reasons why we founded this company was because we had this issue where using another very public geocode provider, you code 2500 addresses per day and if you needed, say, 3000 addresses per day, we had to do like an annual $50,000 a year contract or something crazy like that. There was nothing in between. Having this pay as you go tier for us means that, you can just pay an extra $5 a month or whatever for the additional data and not have to lock yourself into a high priced tier. That is just so important and something real. We promised everybody who’s asking, no, we’ll never give it up, we can’t. It’s just so important that there’s room for the little guys and the big ones, too, right?
Michele: It’s funny sometimes when I’m talking to people, I’m surprised by how often I’ll hear someone say oh, we’re only using you guys for $20 a month. I feel so bad. Is there a way we can pay you more? Which is always kind of a funny thing. Or my boss is really cheap, and I’m like that’s fine, it’s totally fine. Some people only need $20 a month worth of usage, but maybe they’ll go on to a company someday where they actually need $1000 a month of usage or they need it for free. You just never know and it’s not just a relationship with a company, it’s a relationship with a customer and with a person. We just so strongly believe that if you meet them where they are, that will be beneficial for everyone, and may not be always financially, and we’re totally okay with that.
Rob: That’s the beauty of bootstrapping or frankly, just being in control of your company and not having to optimize for growth to the extent that you can’t have that attitude. If that’s what makes you happy as a founder, and you’re happy with your growth, and you’re happy with the way you run your business, that’s why we start companies, so we can be in control of how we treat our vendors, our customers, our investors if we have them, and our team members as well. I think a control thing that I think a lot of folks don’t remember or perhaps they forget as they do it. Well, guys, we are hitting time here. I want to really thank you guys for taking time to chat with me today about Geocodio and your story and all the things you’ve been up to. If folks want to keep up with you, Michele, you release every week on this Software Social Podcast with Colleen Schnettler and on Twitter, you are a prolific tweeter at @mjwhansen and Mathias, you’re @MathiasHansen, but we’re going to put both those in the show notes because spelling Mathias is not perhaps as phonetic as one might think. Thank you guys again for coming on up to Startups for the Rest of Us.
Michele: Thanks so much. Mathias: Thank you so much for having us.
Rob: Thanks again to Michelle and Mathias. Really appreciate them taking the time to have that conversation with me. I hope you.got a lot of value, maybe a little bit of inspiration, some strategies, tactics for yourself.
Michele: Thank you for having us. Mathias: Thank you.
Rob: You are the co-founders of Geocodio. Your h1 reads, hassle-free geocoding, straightforward and easy-to-use geocoding, reverse geocoding, and data matching for US and Canadian addresses. For folks who don’t know, you can enter an address or you can enter a latitude-longitude and it’ll give you back the opposite one. I’m guessing that’s probably how the service started way back in the day but at this point, you guys have added integrations to where you correct misspellings, you have US and Canadian census data, Congressional districts, state legislative districts, school districts, time zones, all that kind of stuff. I’m imagining that didn’t come on day one and you’ve built that all out over the years.
Michele: Yeah, that’s been added slowly. How we often describe it is that a computer doesn’t understand an address, it only understands the coordinates or geocodes. What we do at a very basic level is converting an address into coordinates so a computer can understand it, and coordinates into an address so a human can understand it. Our niche in the market is there’s a lot of data that is only unlocked by having the coordinates. As you mentioned time zones for example, you can only get that data if you have the coordinates. You may be using coordinates to make a map online for example, but you may not even care about maps and you may just want to know the time zone for a particular location.
Rob: That makes a lot of sense. A service like Geocodio is something that my co-founder Derrick and I when we were running Drip, we had an author who was going to go on a book tour and he was going to go to San Francisco, LA, and these various cities. He asked us, is there a way I can go into Drip and query which of my email subscribers are within 60 miles or 100-mile radius of San Francisco? Of course we would have needed either their address, or you can obviously turn an IP address into a “location”, not exact but it would probably be good enough for this purpose. We did actually look into services like this. We never want to build in that feature out but that gives folks—if you’re listening to this—one particular use case of why you may want to use a geocoding service. You guys launched it 6 ½ years ago in January of 2014 as a side project essentially on Hacker News is what I see. My assistant producer found the original Hacker News thread which was generally positive. I mean, sometimes those things go really sideways. There was a comment or two—because you were saying, hey, Geocodio, it’s aimed at developers and it’s a less expensive way to do this. Someone came in, little bit know-it-all comment of like, oh, if you use—I don’t remember what the service was—it ‘ll be this inexpensive blah-blah-blah. Pretty quickly, both of you chimed in with factual data and references of like, no, actually, we are less expensive, we don’t have restrictions on your data and you don’t have to use their maps, you can do it as you want. I thought it was a pretty elegant interaction. I’m curious, did you guys come away from that launch feeling pretty good about the reception? Mathias: There’s definitely a lot of constructive feedback in that thread but also as you said, a lot of positive comments. I think the biggest takeaway we had was, woah, we aren’t really the only people with this problem that we wanted to get solved. We didn’t realize how big the potential market would be. This really showed us that there is a potential here.
Michele: I remember we got hundreds of emails from people after that thread. I remember that day just being absolutely wild. I think that’s what everybody does when you put something in Hacker News, you send it to your friends and you’re like, hey, upvote this. Then if it gets five upvotes and you get 10 people visiting your product, you feel pretty good about it. Seeing that sit on the front page all day, it was just unbelievable. We got so much feedback from people about everything from things they wish we did to complaints about our competitors and how they were so glad to see something like this. We even had the M&A team from a major product reach out to us because they were unhappy with their geocoding. Of course, when we launched our product, it wasn’t that great. Mathias: That’s true. Full context, it was a really, really terrible product when we launched it. It was barely something we could actually use ourselves. We only use it ourselves because we just couldn’t afford anything else. It was not a very good product. The data was not high quality, high equity, things like that. We’ve had a long, long way since then but it was just so cool to see that despite a crappy prototype, there is still so much interest in this.
Michele: As you said Rob, some of those commenters pointed out that with geocoding, the accuracy of the locations is important but what really differentiates us from many other services is that people can use the data without restrictions. They’re allowed to store it in their database. There aren’t these overly cumbersome caching limitations and requirements about using it with a particular brand of map, public phasing only, more expensive pricing, if it’s private phasing only, and all of these things. Us developers ourselves, we’re like that’s annoying and nobody wants to deal with that. We don’t want to deal with that. That perspective of being the customers ourselves is something that we have carried with us the entire time.
Rob: That’s a good perspective. Obviously, if you launched into a space like that that is crowded and is commoditized, to hear that there’s that much of a reception, that you really touched on a pain point is such a good way to get out of the gate. I’m actually surprised to read then—again, I have notes from my assistant producer—that you only made $31 in your first month at the gate. I would expect with a reception like that that you would have had more people using it. Mathias: No, exactly. It was a very success in our heads actually. Our expectations were so low that our success criteria was basically if we can pay for the virtual service to run the servers, if we can pay for that, that’s a success, that’s the ideal. The fact that we made around $31 was enough to cover our $5 a month DigitalOcean instances and there was even testing. It also goes to show being on Hacker News in the frontpage for 24 hours doesn’t mean you’re on overnight success. We had a lot of work in front of us but we had so much fire power, so much enthusiasm to continue working on this. We knew that there was this something here that we can continue trading on.
Michele: Right. We were so surprised that anyone wanted to pay us that when we launched it, we had integrated Stripe. We said we would charge on the first of the following month for pay-as-you-go usage so people can just pay for whatever they needed and we would just charge them once a month. We’d integrated Stripe from the beginning but we were so surprised that anyone wanted to pay us that actually, February 1st came and we looked at each other like, oh, we didn’t actually write any of the code to charge people. We were genuinely shocked that people wanted to pay us.
Rob: I’ve been there with not having billing code, that’s such a great MVP way to do it. Four years later then, the two of you in 2018 both went full-time on the product and were able to financially afford to do that. You mentioned back in 2018 that you have passed $1 million in all-time revenue. That would have been about 4–4 ½ years span. Michele, recently on your podcast Software Social, you mentioned that top-line revenue growth to July of this year was 59% growth compared to last year. Obviously, really, really solid growth is happening. To give folks an idea of scale, you have thousands of customers and I was looking at your homepage. I’ve seen big, big customers here, Amazon, Deloitte, Cushman & Wakefield, Comcast, all that kind of stuff. So fascinating that in a space, I have already said it once but I think commoditized is the word that comes to mind when I think of geocoding data. I don’t necessarily care if I were looking for geocoding data when we worked for Drip. I cared that the company stayed in business, and that the data was accurate, and the price was reasonable, and API was easy to work with, but that was it. I didn’t care about, brand, I didn’t care about a lot of other things that one might care about when searching for a product. Given that geocoding is a volume business and it is harder to differentiate. It does not necessarily lend itself to a defensible mode. I think you guys have mentioned that you’ve done a lot of innovation. You can correct me if I’m wrong, but you’ve done most of your innovation on pricing and integrations. You want to talk a little about that?
Michele: Yeah, we sometimes say that geocoding is sort of selling wood into the software market. Everybody needs it, which creates this really wide market. Our customers are one person companies and freelance developers to huge companies and pretty much every industry. In that commodity market with limited opportunity for most, no opportunity for pricing power, it sounds like a great business to be in, doesn’t it? Where we have kind of carved out our space is really focusing on making it easy for people and that’s where the data integrations come into play where we had past experiences here, for example, if you needed to know someone’s congressional district. Let’s say that you had a Drip customer that was a charity that wanted their supporters to contact Congress about an issue that is important to them. Before Geocodio, in order to figure out which congressperson each volunteer or supporter had, first, you’d have to hit one API to get the coordinates, then you have to hit another one to get the congressional district, and then you have to hit another one to get their actual contact information. You may even have to hit another one to first get the Congressperson’s name, and then another one to get their contact email or whatever their contact form link is, and then you go off and integrate that. You’re hitting three or four different places there and that creates a lot of complications in terms of just managing the data, gathering all of that data. It’s all coming to you in different formats. They may have different terms, different pricing, different restrictions on storing the data, on using the data. Where we have found our success is in trying to eliminate steps in the process for people and making it easy to get lots of related data that’s down the line all in one place. You only have to hit one API to not only parse and standardize the addresses, but you can also add the average household income for an area, or the school districts, or other types of data that you might need for everything from real estate to insurance to simply showing a map.
Rob: That makes a lot of sense and it sounds like it’s much more useful for a customer who would want that information. I’m curious, do they have to pay more for access to it? Because I’m imagining do you have to pay for that data or are you actually going out and actively scraping to get that data? Because it seems like if there’s a cost to you, that you would almost have to pass that onto your customer. I’m thinking like feature gating, right? It’s like if you just want addresses, it’s X amount per month, but if you want congressional districts, is it an add or per check or are you able to offer it just as a one big bundle. Mathias: Yes. For additional data points, we do indeed charge additionally for those. And the biggest thing is additional data storage costs and processing costs.
Michele: With the data, one of the most important parts of our service, the cornerstones is the lack of restrictions on how people use the data. We don’t want to be standing over our customers shoulders telling them how they can and can’t use the data. What that means is that we only integrate publicly available data sources. We’ve actually had quite a few people over the years come to us wanting us to resell their data and we simply have to decline those because one of the most important pieces of our service is that you can do whatever you want with the data and that’s one of the great things about using publicly available data. Now, it may seem counterintuitive that you can charge for that, but a lot of that data is in extremely difficult to use formats that are only available if you have other sort of doorways to the data in addition to the coordinates. How we charge for that, the basic level is that we call everything a look up. For example, one address to coordinate conversion is a lookup. But then if you want to add the time zone, that’s an additional lookup. If you want to add the census identifier. For example, in your Drip example from earlier where the customer wanted to know who was in or around San Francisco and who was around Minneapolis, they could add the census identifiers, which that category of data append at something called the Metropolitan Statistical Area, which is basically the broader metro area and does that radius thing for you. All of those things count as an additional lookup. For example, if someone had a hundred addresses and they wanted five different data appends for them, that will actually increase the number of lookups, that’s actually 600 lookups.
Rob: Which is nice because you’re adding value to your customers, but you also are charging for that value. You have now differentiated yourself from other geocoding services while also essentially charging more, which is a great goal of every SaaS.
Michele: Yeah and the great thing about it is, yes, we can charge for that and also we can charge nothing for it. We have a freemium model and that means that if students or people who simply don’t have a lot of data that they’re working with, they can get that data that they might need as long as they only have 500 addresses or whatnot, they don’t actually have to pay for it. But if it’s a huge company that needs, let’s say for example household income and demographics and other pieces of data, about 300 million addresses in the country, then they will be paying a lot more.
Rob: I feel like I know the answer to this next question, but I want to ask it anyway. How did you know to do all these integrations? What prompted you to integrate time zones, school districts, state legislative congressional, legislative. Were these customer requests, or was there some other way that you figured out your product roadmap?
Michele: Yeah, we talked to our customers.
Rob: Were you proactive by going out to them? Was it a mix of people writing in requests or were you also reaching out saying what we should build next?
Michele: It was a combination. You mentioned that first hacker news thread. There is a ton of feedback on that, some of it negative, mostly positive, and we got tons of emails from people saying hey, it would be awesome if you guys could do this, or you could do that? That kind of planted the seed of talking to people and the value of talking to customers. We were also learning about the space ourselves. Neither one of us did our undergrad in geographic information systems. We very much come at this from a developer’s perspective rather than a geographers perspective. When our customers came to us early on with asks, we would always ask them oh, why do you need that? Because we genuinely didn’t know, and we also had experiences from our own work showing us the value of reducing the number of API calls or places you have to get data from. I think as I grew as a product manager myself and as we worked more in the business, really started deeply talking to customers, not just waiting for them to come to us with requests, but sitting down with them, understanding their complete process, knowing every single point along the way and what those frustrations were, and where they were spending a lot of time or a lot of money, or they had to use a vendor and they didn’t like them for some reason. All of those things contributed to an ever evolving roadmap that is informed by our customers.
Rob: Is that how you decided to build your HIPAA compliant tier or you’re pricing your HIPAA product, I guess. I bring it up because on your software social podcast, you had a really good episode talking about kind of telling the story of how you built it and then I believe no one signed up for it. But the costs of keeping it running were relatively substantial, not inconsequential, I’ll say and you kind of mothballed it for a while and then suddenly a bunch of people out of nowhere wanted to to use it. Mathias: Yeah, exactly, we kept hearing over and over again is your service HIPAA compliant? Can we use this for patient data and things like that? I remember seeing it for the first time. I was like, I don’t even know what HIPAA means, or covers, or anything like that. After hearing this one too many times and also Michele’s doing a lot of custom interviews and hearing this over and over again from customers, we decided to sit down and build out this HIPAA product. It’s probably the biggest undertaking at that time. We had to really rethink our whole product from scratch and make sure everything was secure to much higher standards than we originally built geocodio for. We really pour a lot of time and money into this and we launch it and then poof, nothing. Exactly what you fear and also kind of what you expect sometimes. Indeed since we had to set this up completely separately with separate infrastructure, there’s a lot of upfront cost to us, not just the development costs, but also the infrastructure costs of keeping this running. We basically did not have a single sign up for I don’t even know how long, and we ended up almost completely shutting down this product. But for some reason, we somehow decided to keep it alive, probably just because of all the effort we put into this. It was hard to kill it completely so we decided to keep it on for a little bit longer. Seemingly out of nowhere, we have been seeing a lot of growth on this product this year in particular, really happy that we kept it alive and we actually do a lot of things now to give it a lot of love and attention that it deserves at this point.
Michele: That launch was so hard. Mathias: Yeah.
Michele: The number one rule of bootstrapping is to always make money. We don’t have the luxury of launching something and running in the red for six months or a year. I think it was maybe only a month after we launched and we learned the hard way that the sales cycle is so much longer when you’re dealing with companies that have robust legal departments, which is the case for pretty much any organization dealing with sensitive data like that. We basically had to shut off the pay as you go version of the products, and only it sort of kept it alive on our unlimited tier, which basically we only incur the cost when we actually have a customer. We had the landing page up only for I don’t know how many months. Our sole marketing and sales channel is SEO, we don’t do any outbound sales. We continued working on the landing page a little bit. I think we were a little bit dispirited, quite frankly, though for a while. And then eventually we very, very slowly started getting customers. But I don’t think we actually really believed in it being a significant part of our business or the capability to be a significant part of our business until maybe the middle of last year and then this year really took off. Mathias: I think the big gotcha with launching that product, something we perhaps hadn’t fully understood until after we launched was Geocodio was originally a super classic, sort of low touch SaaS product, self sign up and stuff like that as Michele I mentioned we jumped into all this stuff with long sales cycles. Eventually things started picking up and we suddenly had to do enterprise sales, super high touch, which is, first of all, it’s not very scalable for us to go through the process. It’s not something that was something we were used to or have a little experience with and things like that. That was definitely an uphill battle to start with.
Michele: Yeah. For an example, earlier this year or this summer, we signed a Fortune 100 customer for that product and I started talking to them in May of last year.
Rob: That’s the thing that so many founders don’t realize is the moment you start talking procurement or POs and manual invoicing in terms of net 15 or net 30, you are talking months and months of sales cycle and you’re talking you should be charging between 10 and 100 times what you charge everyone else purely to put up with the hassle or the time and potentially legal costs because they often want custom terms that you have to sign and that instantly becomes this enterprise tier that should be way, way, way more expensive. We talk about this a lot in TinySeed in the first month or two. Most SaaS apps from people who don’t really have this experience dealing with these larger companies. Most assets are underpriced and so if you have tiers that are in, as a random app, if you have $50, $200, to $300 as most of your tiers, if a Fortune 500 or Fortune 1000 company comes in, there are going to put you through the procurement wringer. You should be charging between $30,000-$100,000 a year. It really needs to be there and you should be often charging upfront. They want to pay annual, which is a great cash influx for a bootstrapped company. In addition, a lot of the companies I see that are getting really strong traction, they have what I call this dual funnel. A low touch funnel is much like probably what geocodio was when you first launched it where you come to this low price point, people can sign up with a credit card. You don’t have to talk to them and they just go. The high touch funnel, of course, is your HIPAA tier, but having both of those is like a superpower with SaaS growth because you can get a lot of people using it on the low end and you can get that constant influx and constant kind of, I’d say slower growth perhaps if we’re landing lower priced people. But when the enterprises come through, that’s when you see the really big months of growth hit because you’re again, you should be signing this $20,000 to $30,000 to $100,000 year contract and that gives you this big bump. But if you rely solely on the large ones, of course, there are great businesses built on the enterprise sales. If you rely solely on them, then you tend to have a lot of time invested doing stuff that most of us don’t want to do. I’ll say as makers, as founders, as customer researchers, that’s not our strong suit. It’s not necessarily what we want to be doing is spending time talking to procurement and legal anyway. Those two things add together to give really nice growth. I want to come back to something that Mathias said. He said, out of nowhere, all of a sudden, you started getting these HIPAA customers. Where are they coming from? Because nobody comes out of nowhere, is it just as simple as Google search and search engines or have you been doing other marketing to promote Geocodio?
Michele: We basically don’t do a lot of other marketing. We occasionally sponsor conferences, but mostly those are just conferences that our friends run. It’s very SEO driven. To what you were saying about low touch and high SaaS in combination, it’s been really fascinating for us to see how those interplay and how they feed one another. We will very often find that somebody on a team within a large company will be googling for geocoding or whatnot. They start using us on the free tier or they get their bosses free card and they do a little bit of usage and then anywhere from a day to a month to a year later, they might say hey, we want to get an annual contract. What’s so amazing, especially about having freemium SaaS is that they can try out the product and see if it’s a fit for them before you ever even talk to them. You don’t have to spend all of this time with a huge sales team, doing demos, doing cold calling, cold emailing, all those things. We don’t do any of that because customers can figure out for themselves whether the product is right for them and then they simply tell us when they want to switch to annual. I also find that doing those negotiations where they always want to customize things in the contracts, and there are sometimes difficult scenarios in those negotiations. But I find that having a point of contact at those companies that have already been using our product, is already totally sold on it, and is a huge advocate for the product within the company can make those conversations with legal or with compliance or whatnot a lot easier because they’re doing some of that negotiation for us. They’re advocating for us and time and time again, that’s helpful. It’s always so fascinating to me, seeing the interplay of them. In Slack, we have a feed whenever someone cancels or deletes their account and wants to talk about our product as if someone has an organizational account, they have to delete their old account to be re-added because we never thought about that from the beginning. It’s so interesting to see the comments in that and so often it’s oh, my company got an account, so I’m just deleting this one so I can re-associate it.
Rob: That’s fascinating. This really lines up with what several of the B2B SaaS companies that are growing like a B2C companies, they have superpower growth are companies like Slack where they have the bottom up approach. That’s been a big thing where a small team of three or four starts using it and then another team of ten and then a team of 20 and suddenly the IT department’s like wait, we need single sign on. We want to manage it. We want an annual contract. We want a paid version, and they want to bring it under the corporate umbrella. That’s in essence what is working for them. A big part of that is a really inexpensive or a free tier, frankly, because that allows people to use it. Once they’re in it, you have the champion, much like you’re saying. I was looking at an app, I have no idea what it was but it was a SaaS app. They had a free tier and then their pricing started at a thousand dollars a month and up. It was like they know their customers because they know that people want to try for free, get used to it. If it’s valuable, it was worth $1000 a month. It was some type of enterprise type tool that, again, I don’t recall what it was, but that’s when you know that someone has thought it through and not just said well, I’m going to have free. Isn’t it usual that you do like a $50, $100, and $200 dollar plan? It’s kind of the basics. Someone has really refined and honed it and that is an obvious advantage both for companies like Slack and even for bootstrapped assets like yourself. Mathias: Yeah, I say from a pure economics and finance perspective, I think a lot of things we do will be a lot simpler, but it’s a bunch of plans we can so predict MRR things like that. Having this pay as you go tier means that basically the revenue from each customer can vary like crazy depending on their usage. But I feel like that’s also a cornerstone of the foundational part of the company and how we started out. We really, truly believe that anybody should be able to afford this. One of the reasons why we founded this company was because we had this issue where using another very public geocode provider, you code 2500 addresses per day and if you needed, say, 3000 addresses per day, we had to do like an annual $50,000 a year contract or something crazy like that. There was nothing in between. Having this pay as you go tier for us means that, you can just pay an extra $5 a month or whatever for the additional data and not have to lock yourself into a high priced tier. That is just so important and something real. We promised everybody who’s asking, no, we’ll never give it up, we can’t. It’s just so important that there’s room for the little guys and the big ones, too, right?
Michele: It’s funny sometimes when I’m talking to people, I’m surprised by how often I’ll hear someone say oh, we’re only using you guys for $20 a month. I feel so bad. Is there a way we can pay you more? Which is always kind of a funny thing. Or my boss is really cheap, and I’m like that’s fine, it’s totally fine. Some people only need $20 a month worth of usage, but maybe they’ll go on to a company someday where they actually need $1000 a month of usage or they need it for free. You just never know and it’s not just a relationship with a company, it’s a relationship with a customer and with a person. We just so strongly believe that if you meet them where they are, that will be beneficial for everyone, and may not be always financially, and we’re totally okay with that.
Rob: That’s the beauty of bootstrapping or frankly, just being in control of your company and not having to optimize for growth to the extent that you can’t have that attitude. If that’s what makes you happy as a founder, and you’re happy with your growth, and you’re happy with the way you run your business, that’s why we start companies, so we can be in control of how we treat our vendors, our customers, our investors if we have them, and our team members as well. I think a control thing that I think a lot of folks don’t remember or perhaps they forget as they do it. Well, guys, we are hitting time here. I want to really thank you guys for taking time to chat with me today about Geocodio and your story and all the things you’ve been up to. If folks want to keep up with you, Michele, you release every week on this Software Social Podcast with Colleen Schnettler and on Twitter, you are a prolific tweeter at @mjwhansen and Mathias, you’re @MathiasHansen, but we’re going to put both those in the show notes because spelling Mathias is not perhaps as phonetic as one might think. Thank you guys again for coming on up to Startups for the Rest of Us.
Michele: Thanks so much. Mathias: Thank you so much for having us.
Rob: Thanks again to Michelle and Mathias. Really appreciate them taking the time to have that conversation with me. I hope you.got a lot of value, maybe a little bit of inspiration, some strategies, tactics for yourself.
Episode 523 | Breaking Through Plateaus, Entrepreneurship for Kids, Common Bootstrapper Mistakes, and More Listener Questions
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In episode 523, Rob hosts a rapid-fire lightning round of listener questions ranging from whether to focus on one or multiple businesses, finding the right amount of customer research, breaking through slow growth, and teaching entrepreneurship to kids.
The topics we cover
[4:38] If you were starting a business today and you were earlier on in your career, would you try multiple business ideas at once or go all-in on one?
[8:11] If building your first tiny product, like a WordPress plugin, what level of customer research should you do?
[10:56] What advice would you give to someone entering a somewhat competitive market?
[15:55] What questions would you be asking yourself if you had a slow-growing 12k MRR B2B SaaS?
[18:22] How would you go about offloading tier-one customer support?
[20:28] How do you feel about entrepreneurship being taught to children?
[22:24] What are things you noticed that bootstrappers commonly overlooked that are preventing them from achieving their goals?
[23:18] What are some of the biggest takeaways you can see across your portfolio of early-stage SaaS companies?
[25:01] Have you ever built a business that got a fairly large portion of its revenue from services instead of products, but not just you consulting?
[26:56] How do you prepare financially or otherwise for your retirement?
Links from the show
- MicroConf Connect
- SavvyCal
- Stay on Top of Your SaaS Metrics: Know What to Measure to Maintain Sustainable Growth – Craig Hewitt
- The 2020 State of Independent SaaS
- ZenFounder
- Indie Founder Bootcamp
- AudienceOps
- Castos Production (formerly Podcast Motor)
If you enjoyed this episode, let us know by clicking the link and sharing what you learned.
Click here to share your number one takeaway from the episode.
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
Thanks for joining me this week on Startups For the Rest of Us. I am your host, Rob Walling, and this is Episode 523 where I answer a bunch of listener questions, have a rapid fire lightning round of listener questions. This episode is from MicroConf On Air a few weeks back and there were so many good questions. I spent about 30, 35 minutes answering them. It felt almost a natural Startups For the Rest of Us episode.
Once we dive in, you will hear a little bit of the intro music and hear me intro MicroConf On Air, which is a live stream that we do every Wednesday at 1:00 PM Eastern, 10:00 AM Pacific. If you haven’t checked it out, head to microconfonair.com and you can check out an episode. Sometimes I do live Q&A, taking questions from the chat in MicroConf Connect and in the YouTube comments. Other times, I have a conversation with a successful entrepreneur or an early stage founder. It’s a good time.
You can hear those MicroConf On Air episodes in a podcast feed at microconfpodcast.com if you’re curious to check them out in audio each week. Before we dive into that, I want to remind you that through MicroConf, we are putting on the first of its kind SaaS podcast awards. You can head to saaspodcastawards.com to nominate your favorite SaaS, or bootstrap, or podcast in one of four categories if you haven’t already gone and nominated. Or if you just want to nominate a couple of different shows, please head over to saaspodcastawards.com.
With that, let’s dive into this all listener question episode of Startups For the Rest of Us/MicroConf On Air, where I answer questions like how do you feel about entrepreneurship being taught to children? If you had a slow growing B2B SaaS app, what questions would you be asking yourself to break through the plateau? How do you prepare financially and otherwise for your retirement? What are things you notice that bootstrappers commonly overlook that are preventing them from achieving their goals? And how do I keep my hair looking good during the pandemic? It’s a real question. I probably should have given more of a joke answer. Somehow, I was in the flow of answering questions and I talked about that. With that, let’s dive in.
We are live and welcome to today’s episode of MicroConf On Air. I’m your host, Rob Walling, live streaming direct from my bunker library here in Minneapolis, Minnesota. Every Wednesday at 1:00 PM Eastern and producers, Andrew and I stream for 30 minutes and we cover topics related to building and growing ambitious SaaS startups that bring us freedom and purpose and allow us to value and maintain healthy relationships. We believe that showing up every day and shipping that next feature, that next piece of marketing copy closing that next sale is the way to build a sustainable company.
Thanks so much for joining me today. Today is an all ask-Rob episode. We’re going to be doing live Q&A. We have some good questions coming in on Twitter and in the MicroConf On Air channel in MicroConf Connect. If you’re not part of MicroConf Connect already, you should head into microsoftconnect.com. We have more than, I believe it’s over 1600 founders, bootstrappers, and mostly bootstrapped founders in there hanging out and having conversations like this every day. What I love is when I get into Connect and there’s a solid thread where I see a question and—I know the answer to this, or I have a thought on this, and I go in—and there’s already five amazing answers from other experienced founders who have done exactly this. I don’t even need to weigh in because the answers are good and they’re all legit. I am checking out some questions.
Today, I normally introduce my guest here, but you’ll know me as co-founder of Drip, and MicroConf, and TinySeed, Startups For the Rest of Us host and author of Start Small, Stay Small. I’m going to be answering a bunch of questions today, and it’s a good audience. It’s a great group of creators that are here in MicroConf Connect and participating on Twitter, and just into this MicroConf averse. I did an interview last week. If you haven’t checked this out on Indie Hackers, Courtland Allen and I had a conversation for about 1 hour and 10 minutes, solid, good questions from Courtland, good thoughts from him. I was just weighing, and we were just talking about frameworks, and advantages, and opportunities for launching SaaS in October of 2020. It was very specific to now. Not 5 years ago. Not 10 years ago. That’s spring on a few of the questions that we have today.
I’m going to dive in there. But first I’ve had a request already for a tell-a-joke. In true MicroConf dad joke tradition, this Fibonacci joke I’m going to tell you, it’s as bad as the last two you’ve heard combined. Normally at MicroConf, there’s all these groans. There’s groans, and laughs, and some people clap—slow clapping, golf clapping me—but without that, it loses a little bit.
My first question and today is from Noah Bragg. Thank you, producer Sander. It’s about 20 seconds late. Noah Bragg from MicroConf Connect asks, “If you were starting a business today—I’m going to assume it’s a SaaS company—and you were earlier in your career, would you try multiple business ideas at once, or go all-in on one?” This is a good question.
All-in is a deceptive phrase because I wouldn’t just dive in and say, oh, I have this idea. Oh, I’ve done some validation. Now, I’m going to spend the next six months going all-in on this idea. That’s not what I would do, but I would focus on launching and validating one idea at a time. Personally, I have a huge belief in focus. I’m not saying you can’t own multiple products at a time because I was the King of these micro portfolios back in the day, where I had 10 different products generating revenue for me. But I didn’t launch and grow 10 at once. I launched or acquired and grew one at a time, and then I figured out a way to make it sustainable, and more autopilots, a misnomer. But mostly an autopilot for now is how I’ll phrase it.
It’s on autopilot for 3-6 months. Until something happens, we’ll have to circle back. But focusing on one thing, you get into the headspace of it. All the information and content that you’re consuming, you can adapt or think through how you can apply it to that one thing. I would be doing a ton of validation at every step. When I first come up with an idea, I always think 90% this thing’s going to work. Then by 24 to 48-hour cooling off period before I register any domain, which is what I do these days, I wind up falling down to 10% or 20% certainty that this thing’s going to work.
Then typically I say, okay, what’s my next step to validate, how can I get myself to 25% or 30%? Oftentimes, it’s sending a few emails to people I know. It’s putting something on Twitter, asking opinions. It’s having face-to-face or in this case, these days, Zoom conversations. I might be putting up a landing page, driving traffic to it—whether it’s from my podcast, whether it’s from Twitter, whether it’s from running cold ads, which I did back in the day when we were validating Drip. I would just try to get that validation one step further, one step further.
That’s if I’m going to build maybe a larger, more novel product that doesn’t exist in the space today, and I’m trying to validate the idea itself. What if I know that there’s a gap in the WordPress plugin market, or that all the plugins that do polls on WordPress is just an example that they aren’t very good, or that I know that I can rank. It’s not that hard to rank high in the WordPress repository. There’s just a little bit of WordPress SEO. The algorithm is not as complex as Google. It’s not that smart.
Maybe I don’t want to validate that everybody needs a polling plugin. Maybe I want to validate that I can just rank higher. I get something in there or I email the top 10 poll plugins, especially the ones that haven’t been updated in two or three years, and I say, can I adopt your plugin or can I buy your plugin? These are ways that I would be going about. You don’t always have to build the thing from scratch, but the question of multiple or one, which should you focus on, in my opinion, unless you’re stair-stepping, and even with stair-stepping, I would focus on that. I was going to do an info product at the bottom end, or I would do that WordPress plugin or something as step one, and then I would build on it from there.
“How do you get your hair looking so good during a pandemic?” From Pat Foley. Thank you, sir. I did wear a mask and I get haircuts. That’s the honest answer. I had pandemic hair for the first four months because everything was shut down here, but we are still in—I don’t even know what—stage one lockdown where you can go to places. I went to the gym the other day. We wore a lot of face masks, but knock on wood, Minneapolis is not doing as poorly as many of the states around us. I appreciate the joking question, but that is the honest answer.
Question number two, also from Noah Bragg and MicroConf Connect. He’s following up on the above question. He says, ”If building your first tiny product like a WordPress plugin—” Hey, that was my example. I often say info products to WordPress plugin. There are Shopify ad-ons, there are Photoshop add-ons, there is a Google app store, Google Chrome store, things you can build. There’s a myriad of them. There are Magento ad-ons, we can go on and on. Anytime there’s an app store. Anytime there’s an ecosystem that has something that you’re not just battling to rank in Google for, these are the types of step one ideas I would encourage people to look at.
“If you’re building a first tiny product like a WordPress plugin, what level of customer research should you do? Is it more you see a problem and ship something? Or should you take a more cautious approach and try to validate further before shipping? I appreciate someone handing over money is the only real validation, but I’m trying to get an idea of how quickly you should move and whether it’s a case of trying lots of small bets. I hope that makes sense.” It does make sense. I would tend to act pretty quickly. I wouldn’t tend to do a bunch of customer validation calls or a bunch of customer development calls if I was going to do a small step one thing. I would validate almost in the Start Small, Stay Small approach. You go to startsmall.com, it’s my first book.
While the exact tools and exact numbers that I use there may not be accurate today because it’s 10 years old, the tactic there was you find a small niche or you find even not a small niche, but with an underserved corner that you can somehow measure the interest, whether that’s looking at a WordPress plugin and the repo and saying, oh, it has this many downloads. It must be a popular search term. Or you go to the Google keyword tool or you go to Ahrefs, or SEMrush, or Moz today and you say, oh, there are 5000 searches a month for this thing, and there are a couple of tools, but they’re not that great, or they’ve been abandoned.
There’s ways to validate just using free or lightly paid keyword tools and trying to find gaps in these markets. Even these days, there’s fewer gaps, but it’s places where people have launched and abandoned, or they’re not doing a good job and you see an angle. Then I would try to write some code quickly and move there.
Having a few customer development conversations or trying to figure out, hey, where do these people hang out that would use a plugin like this? Oh, they’re on Facebook. They’re in a couple of Facebook groups. Become a part of those Facebook groups and participate in them. They’re in these Slack groups. They’re in these forums. These discourse or discuss groups. There are ways to get this up to, I would say 20%, 30%, 40% validation, and to be able to write code and ship something in two weeks, three weeks.
For my bet, for my money, I’m probably going to write a little bit of code and get it out there. The learning starts with every bit of validation and frankly, getting something out there quickly in this—small niche is not the right word—but if it is a micro idea, I would lean towards action more than trying to validate for months and months.
Next question from Rami, he is King Ram Star on Twitter, “What advice would you give to someone entering a somewhat competitive market? Let’s say 5-10 direct competitors, which sounds ugly, but it’s less ugly than CRM, project management software, ESPs, marketing automation providers, where there are hundreds of players. Five to ten direct competitors, while that’s a thing, not the end of the world. More specifically, what would you do to out-muscle the competition when the resources are fairly equal, but the competition has social proof and social capital?”
I would not try to out-muscle the competition if I did not have a lot of money, or social capital, or social proof. You’re not going to muscle them. There’s this move in Jiu-Jitsu, or just the whole premise of Jiu-Jitsu is if someone has a bigger opponent than you, you don’t go head on with them and try to out strength them or out-muscle them because they will win. What you do is that you try to take their momentum when they punch you, when they lunge at you, and you peri and you use their momentum against them to get them on the ground, and then you grapple.
Similarly, I would use my opponent’s strengths against them. An example is you have 5-10 direct competitors. They have social proof and social capital. What are they doing wrong? Are you in their forums or their private Facebook groups? What are their customers complaining about? Where are they dropping the ball? Because companies that get to $1 million in ARR, $10 million in ARR, they tend to be leaving out sections of the market that they just have to ignore. They may be disappointing a certain subset of their customer-base or of their prospect-base.
It’s even better if you get big competitors because these are way easier to compete against. Companies like QuickBooks and PayPal. Think of Stripe launching at PayPal. Think of Xero launching at QuickBooks. Think of Drip launching against Marketo, Pardot, and Infusionsoft. They’re these big lumbering companies that aren’t shipping very often. They don’t have the amazing UX that you can build from the ground up. They aren’t just doing hand holding with their customers, they aren’t building the features that a subset or a vertical of the customer set might want.
I would start at the grassroots and I would start by trying to find 5 or 10 unhappy customers that I could interact with and say, what are you unhappy with? If you’ll get someone on the phone and they’ll just complain about everything—oh, the app’s impossible to use, and it’s too expensive, and no one listens to my phone calls, and I send them 10 emails a week and they don’t respond. That’s a toxic customer, they’re angry with everything all the time, they’re going to be unhappy with you too, goodbye.
But then you’ll get people who are, they’re pretty reasonable. They have ignored this corner of the market where photographers have special—I’m making this up. But photographers have special bookkeeping needs and their tax is calculated differently, and QuickBooks has just not listened. Suddenly it’s, oh, really? Who else could support photographers tax, bookkeeping, accounting needs? What other things have you tried to fix this? I’ve looked and there’s not an app that does this. Well, then it’s okay. Can I find 10 more photographers, or salon owners, or whoever it may be startup founders. That’s where I would start is, how do you find that subset if you have all this competition that is being left out.
The other thing I would think about, if you’re already in the space, you try to look for the hated competitor and become the opposite of them. If you can’t figure out a unique positioning—we’re the opposite of QuickBooks because we suck less, or we like QuickBooks but we’re for this particular vertical.
Think of SavvyCal. There’s Calendly and there’s all these big competitors. But look at what Derrick Reimer’s doing with SavvyCal. You go to savvycal.com to check it out. He’s basically saying it’s for busy startup founders and executives who have some pretty specific needs, and want to maybe guard maker time, and want to eliminate the awkwardness of sending a calendar invite. He’s taken a pretty specific tack there. He’s taking a unique position in the space. That’s one way. Another way in these competitive spaces is to have a unique traffic channel. That is, you look at what someone, maybe Ruben Gamez, is doing with Docsketch, which is e-signature, docsketch.com. It’s a terribly crowded space with literally billions and billions of dollars in market cap are in that space, and yet he has figured out a way to do amazing content marketing, amazing SEO, and just channel some of that traffic to where he is being highly successful in a competitive space.
To summarize, if I was going to go into a competitive space like this, I would look for a hated competitor. I would look for areas where that competitor is dropping the ball with either a specific audience or a specific group of people. I would look to position myself uniquely, or I would look for a unique traffic channel. With Drip, we had three of those four. Every one of those you have is better. If you only have one, you can still make it work, it’s just more of an uphill battle. Thanks for the question, Rami. I hope that was helpful.
The next question is from Garrett Lancaster, from MicroConf Connect. He said, “If you had a slow-growing $12,000 MRR, self-funded, B2B SaaS,” I love the specificity of this. “Doing about $150,000 a year, self-funded B2B SaaS, what questions would you be asking yourself?” I think he’s implying it’s slow-growing. What questions would you be asking yourself to get it growing faster? “How much do you think about retention versus conversion in this position?”
If my retention was not high, I have a problem. I’m going to use this phrase that is its product-market fit. I know that’s just a big, muddy, amorphous thing, but all it means is are people sticking around? Do people love your product? Do they stick around? Is your churn below 6%, 7%, your aggregate churn below that number? It depends on the price point, it depends on a bunch of stuff, but if you’re below 5%, then I would not be worried about retention now. I would be looking at increasing traffic and increasing conversion. The big question to ask is where’s the metrics gap? If you’re churning out 10%, 12%, 15% a month, that’s the number one problem. That’s what you have to fix before you do anything else.
That’s where I found myself when we were building Drip. We were a few months after launch and we had grown to $8000-$10,000 a month and we’re churning everybody out. That was a big retention problem. You can watch my MicroConf Talk, The Inside Story of Self-Funded SaaS Growth, I believe it’s called. It’s from, whatever, 2014, 2015.
If your retention is fine and people get on and then churn goes low for people, then, of course, it’s how much traffic, which your visitor-to-trial sign-up rate or visitor-to-trial should be, I’d like around 1%, if I’m asking for a credit card. I’d like about 15%, give or take, maybe 20%, if I’m not asking for a credit card. If I’m substantially below those, you have a trial conversion problem.
If I’m asking for a credit card upfront—trial to paid, I want to be between 40% and 60%. If I’m below 40%, I have a problem. You can look in the state of independent SaaS from 2020 and look at what other conversion rates are, or you can look at Craig Hewitt’s talk from MicroConf Europe in—was it just last year? It feels like 5 years ago. It was just last October. It’s something about viewing your metrics, maybe producers and they’re composed of that in the MicroConf Connect Slack. But he basically walks through rules of thumb and then says, these are the things to pay attention to if you’re below these rules of thumb. Otherwise, move on to the next thing.
At a certain point, my whole funnel is actually pretty solid. Now I’m just going to drive more traffic. I need to spend money on ads. I need to spend money on content. I need to do integrations. I need to go on podcasts, whatever it is, then let’s just see it. As you get more traffic, your conversion rates almost inevitably drop. Then you have to figure out how to then cater to those new folks.
The next question is still from Garrett. He says, “How would you go about offloading tier 1 customer support,” meaning frontline. Let’s say, it’s intercom chat, or it is usually just messaging or it’s email. “How would you go about offloading it when quality support/training is an integral part of your business model?” Everyone who asks this question says when quality support/training is an integral part of your business model—it’s an integral part of every early startup’s business model.
Much if I’m a developer, I write the best code in the world, I always feel like I can give the best support. In many cases, that’s relatively accurate. But how would you go about it? You find someone who’s really […] good. That’s what you do. You don’t settle for someone who isn’t going to learn your tool and who isn’t going to be ravenous about wanting to make people happy and learning your tool.
I had a non-technical, non-developer support guy that I worked with from, it was about 2011, 2012, all the way through when we were acquired. Then he worked with Drip through 2018, 2019. He was not a developer, but he figured out how to view source. He would go dig into people’s JavaScript and hack around in it. Obviously, on his client-side, he wouldn’t hack their website. I taught him how to use FTP. He learned how to edit HTML. He was just teaching himself this stuff.
He would sometimes ask me for a Loom, a quick screencast about stuff. For the most part, he went out and educated himself. In the early days, was he the fastest responder to tickets ever? Well, no because he was teaching himself stuff. But by the time he was working on Drip for a year or two, he knew the product. He knew how to answer support way better than any of us— way better than me, way better than the developers—and that’s the kind of person you’re looking for.
How did I find him? I went on Upwork and I went through two or three support people until I found a guy who was really good. He was working for a bunch of companies at once. He was doing 3 hours for me and 5 hours a week, then 10. Eventually, I said, I just want to hire you full-time, I was good to work with. We got along. We never did video chat, we never actually met in person. He lived in Mexico and that was it.
Many of you, if you emailed Drip, Andy responded to every support request for the first 3 ½ years of Drip’s life. I think it was 3 ½, maybe it’s 2 ½. Every single frontline support was just one guy, Andy. That’s what you do. That’s what I would do today. Hire good people.
The next question from Pablo in MicroConf Connect, “How do you feel about entrepreneurship being taught to children? Do you think it should be taught? Have you witnessed good execution of teaching children entrepreneurship?” I feel good about it with a caveat. My son had a course in eighth grade or maybe it was freshman in high school. It was teaching him stuff about intellectual property. It was trademarks and it was logos and he had to design a logo. We’re they teaching him everything we learned in MicroConf? Of course not. But did he learn some basics that he didn’t know the difference between trademark, and copyright, and some basic fundamentals? I thought that was good.
All of us in high school/college should learn something about entrepreneurship, something about how businesses work, something about personal finance, to be honest. Why is that not taught in school? Why do none of us know how the stock market works? You have to go do educate yourself. You have to go seek that out. How to just simply find a budget and stick to it. To me, it’s a real problem that is not taught to—whether it’s our children or probably our high schoolers.
We have Civics and Economics where we learn about the economy and nobody pays attention about the three branches of government. I’m only joking. Of course, people pay attention. But personal finance and something about entrepreneurship, they should be exposed to it to know this is what entrepreneurship might look like.
There are examples of people who are making caramels or cookies in a local kitchen and you could do a tech startup and raise funding or not. Do you think just being exposed to that would be super helpful for children? Yes, I do think it should be taught. I can’t think of an amazing example of anyone who’s done it.
I will give a spoiler that—I don’t know if she’s announced this—but Dr. Sherry Walling, my wife is writing a book called, Raising Entrepreneurial Children or something like to that effect. That’s the working title. Go to zenfounder.com and sign up for her email list if you want to hear about it. Of course, I’ll be talking about in the future. I may even contribute a chapter or two. Sherry and I had a ZenFounder episode a while back. Zenfinder episode in the first maybe 30 episodes that was all about raising entrepreneurial kids, if you want to check that out.
Next question, “What are things you notice that bootstrappers commonly overlook that are preventing them from achieving their goals?” A lot of bootstrappers overlook the fact that you have to market, that it’s not about building products. Bootstrappers don’t pay enough attention to their metrics, their analytics, or their metrics. They don’t even know what’s working. You ask someone a question and they say, what’s working is word of mouth. Word of mouth is usually the wrong answer.
There’s a lot of mistakes that people make. MicroConf talks point this out. I would say listening to Startups For the Rest of Us, even nugget.one, which is a pretty interesting website, Justin Vincent has a pretty interesting course there. There are definitely the common mistakes before finding an audience building before validating—not an audience—but a customer base building before validating. These are a lot of things that people do. People give up too easily. They build something, it goes to a plateau, and they give up instead of actually doing the hard work, it’s a lot more hard work than people realize.
Another question. This is from Vijay Goel from Chefalytics. He says, “What are some of the biggest takeaways you can see across your portfolio of early-stage SaaS companies? Is it one or two winners generating most returns? VC style? Is it steady progress by most? Will the majority be default alive businesses?” The answer is yes. The vast majority are already default alive businesses.
Every one of the 13 companies of batch 2 is default alive, pretty sure. If I were to put a number to 70% of batch 1, maybe 80% are default alive. So yes, default alive, all of them are making steady progress. Of 23 companies, there’s maybe two or three that are still not growing— two, three, four—it’s a small number. Maybe 10%, 15% are still trying to find that repeatable channel, still trying to find that repeatable customer base, but it is definitely steady progress. I don’t think it’s going to be winner-take-all. But, to be honest, I shouldn’t say I don’t think it will.
Einar did analysis of a bunch of SaaS apps. He got a bunch of anonymized data and he looked backwards over the last five years. If you do look at returns, it was not winner-take-all, but it was definitely a power law. Power law just means there is a small number who get 10 or 100 times larger than the others. In that case, yes, that era in that sense, yes, we may get there. I’ve been doing this for 15 years. There’s a reason MicroConf, and Startups for the Rest of Us, and my books, and TinySeed exist. It’s not to help the winner-take-all. It’s to help everyone. I want to raise the tide so all the boats go up. Yes, even if the returns are generated in that VC style winner-take-all, I will still be around and still be here to help everyone involved.
The question from Patrick Foley, “Have you ever built a business that got a fairly large portion of its revenue from services instead of products, but not just you consulting?” Yes. One I can think of, it’s called CMS Themer. It was a productized service before that term existed. It was at www.cmsthemer.com. I don’t even know if there’s a website there anymore. I ran it for about 18 months to 2 years. I acquired it from someone who wanted to shut it down. I knew how to rank it in Google. I got it to the top first page of Google for WordPress theming and some other things were present, Drupal and Joomla. Then I just had an agency—I believe they were in India—it was somewhere that I could outsource to for cheap. I marked them up 100%. I would charge $500 for you to send me a PSD, I would send it to my agency in India, they’d charge me $250 to turn it into a theme. I would send it back and make $500. It wasn’t a productized subscription service, but it was these one-off themes.
As custom stuff happened, we would increase the price. If you needed something more responsive back in 2009, it was obviously more money. Yeah, I have. It was fine. It was a little, quite a bit of hassle. I had that along with a bunch of software products and ecommerce and stuff. I’m trying to think if there are any takeaways I have from that. Productized services are a great way to get started quick these days, especially subscription services. You look at Audience Ops from Brian Casel, or you look at Podcast Motor from Craig Hewitt and there are other examples.
They get up to whatever $20,000, $30,000, $40,000 a month in no time. And then yes, you have to have a process in place, you have to have people to manage. It’s not a software product, but you learn a lot. It’s probably 70%, 80% the same as building a SaaS. Then Craig Hewitt levered it up to then acquire WordPress plugin to then build Castos and now, everything’s combined into one. It’s like a match made in heaven and it’s like a chef’s kiss to the stair-step approach in a way is building these businesses and building on top of each other.
And now one more question from Christoph Engelhardt, “How do you prepare financially or otherwise, for your retirement?” It’s a good question. I like personal finance. I’m a bit of a nerd with this stuff. Before I had sold Drip, I was contributing to retirement for most years—for both Sherry and I—putting them in the US. There are IRAs or 401(k)s.
I did stop. I will admit at the worst times of Drip, when it was growing fast and we had cash crunches, I stopped contributing to retirement. My bet was that Drip would make enough money in the end, whether through an acquisition or whether through throwing off cash, that it would make up for that. The bet worked out for me. It’s not going to work out for everyone. But by the time we sold Drip, I believed between Sherry and my retirement accounts, we had about $300,000, which I was in my late thirties. Is that right? I might’ve been in my early forties. I would prefer to have more by then, but when I looked at compounding and how it was growing, we would have had I’d say a couple million when we retired. But I also counted on having a lot more earnings and being able to put money in.
For me, it’s about saving early. I started contributing right out of college. In fact, if you can do anything for your kids, or nephews, or whatever—I’ll comment on the US because I know the retirement system here—but if there is a RHYTTAC-shielded retirement account, an individual retirement account called an IRA here, as soon as your kids get any income, match what they make, give and put the money. You can put up to $5500 as of this taping into a retirement account.
If you can put it in when they’re 15 or 16, compound interest is the eighth wonder of the world. I believe Albert Einstein said that. The earlier you get, if you invest at 15 versus 30, you get two more doublings of that, if you invest in the stock market. Put it all in high-risk stuff. I would be 100% in stocks. If you’re making 8% per year, then it’s going to double every 9 years. If you make 9% per year, it’s going double every 8 years. From 15% to 30%, you get almost two doubles of that. If you put in $5000, it becomes $10,000, then $20,000 by the time they’re 30. If they don’t contribute until 30, they have to contribute $20,000 to have the same impact that you do when they’re that young.
I started putting money in when I was 22, and just a little bit. I didn’t have much money. I wasn’t making much. I make $15, $17 out of college per hour. But I started putting $50, $100 a month away as early as I possibly could.
Thanks so much for joining me today. That is going to wrap us up. Thanks for hanging out with me a little longer. Last joke, can you imagine if one day MicroConf acquired Microsoft? Ooh, that was a misspoke. Can you imagine if one day Microsoft acquired WIWORK and named it Microsoft Office?
We do have some special podcasting stuff coming up soon. We’re going to have some voting and some nominations. I’m teasing that, so keep your eye out at microconf.com and thank you as always to Hey and Stripe for supporting MicroConf Headlines partners for the year. We love working with them. Thanks for joining me. I’ll see you next week.
Once we dive in, you will hear a little bit of the intro music and hear me intro MicroConf On Air, which is a live stream that we do every Wednesday at 1:00 PM Eastern, 10:00 AM Pacific. If you haven’t checked it out, head to microconfonair.com and you can check out an episode. Sometimes I do live Q&A, taking questions from the chat in MicroConf Connect and in the YouTube comments. Other times, I have a conversation with a successful entrepreneur or an early stage founder. It’s a good time.
You can hear those MicroConf On Air episodes in a podcast feed at microconfpodcast.com if you’re curious to check them out in audio each week. Before we dive into that, I want to remind you that through MicroConf, we are putting on the first of its kind SaaS podcast awards. You can head to saaspodcastawards.com to nominate your favorite SaaS, or bootstrap, or podcast in one of four categories if you haven’t already gone and nominated. Or if you just want to nominate a couple of different shows, please head over to saaspodcastawards.com.
With that, let’s dive into this all listener question episode of Startups For the Rest of Us/MicroConf On Air, where I answer questions like how do you feel about entrepreneurship being taught to children? If you had a slow growing B2B SaaS app, what questions would you be asking yourself to break through the plateau? How do you prepare financially and otherwise for your retirement? What are things you notice that bootstrappers commonly overlook that are preventing them from achieving their goals? And how do I keep my hair looking good during the pandemic? It’s a real question. I probably should have given more of a joke answer. Somehow, I was in the flow of answering questions and I talked about that. With that, let’s dive in.
We are live and welcome to today’s episode of MicroConf On Air. I’m your host, Rob Walling, live streaming direct from my bunker library here in Minneapolis, Minnesota. Every Wednesday at 1:00 PM Eastern and producers, Andrew and I stream for 30 minutes and we cover topics related to building and growing ambitious SaaS startups that bring us freedom and purpose and allow us to value and maintain healthy relationships. We believe that showing up every day and shipping that next feature, that next piece of marketing copy closing that next sale is the way to build a sustainable company.
Thanks so much for joining me today. Today is an all ask-Rob episode. We’re going to be doing live Q&A. We have some good questions coming in on Twitter and in the MicroConf On Air channel in MicroConf Connect. If you’re not part of MicroConf Connect already, you should head into microsoftconnect.com. We have more than, I believe it’s over 1600 founders, bootstrappers, and mostly bootstrapped founders in there hanging out and having conversations like this every day. What I love is when I get into Connect and there’s a solid thread where I see a question and—I know the answer to this, or I have a thought on this, and I go in—and there’s already five amazing answers from other experienced founders who have done exactly this. I don’t even need to weigh in because the answers are good and they’re all legit. I am checking out some questions.
Today, I normally introduce my guest here, but you’ll know me as co-founder of Drip, and MicroConf, and TinySeed, Startups For the Rest of Us host and author of Start Small, Stay Small. I’m going to be answering a bunch of questions today, and it’s a good audience. It’s a great group of creators that are here in MicroConf Connect and participating on Twitter, and just into this MicroConf averse. I did an interview last week. If you haven’t checked this out on Indie Hackers, Courtland Allen and I had a conversation for about 1 hour and 10 minutes, solid, good questions from Courtland, good thoughts from him. I was just weighing, and we were just talking about frameworks, and advantages, and opportunities for launching SaaS in October of 2020. It was very specific to now. Not 5 years ago. Not 10 years ago. That’s spring on a few of the questions that we have today.
I’m going to dive in there. But first I’ve had a request already for a tell-a-joke. In true MicroConf dad joke tradition, this Fibonacci joke I’m going to tell you, it’s as bad as the last two you’ve heard combined. Normally at MicroConf, there’s all these groans. There’s groans, and laughs, and some people clap—slow clapping, golf clapping me—but without that, it loses a little bit.
My first question and today is from Noah Bragg. Thank you, producer Sander. It’s about 20 seconds late. Noah Bragg from MicroConf Connect asks, “If you were starting a business today—I’m going to assume it’s a SaaS company—and you were earlier in your career, would you try multiple business ideas at once, or go all-in on one?” This is a good question.
All-in is a deceptive phrase because I wouldn’t just dive in and say, oh, I have this idea. Oh, I’ve done some validation. Now, I’m going to spend the next six months going all-in on this idea. That’s not what I would do, but I would focus on launching and validating one idea at a time. Personally, I have a huge belief in focus. I’m not saying you can’t own multiple products at a time because I was the King of these micro portfolios back in the day, where I had 10 different products generating revenue for me. But I didn’t launch and grow 10 at once. I launched or acquired and grew one at a time, and then I figured out a way to make it sustainable, and more autopilots, a misnomer. But mostly an autopilot for now is how I’ll phrase it.
It’s on autopilot for 3-6 months. Until something happens, we’ll have to circle back. But focusing on one thing, you get into the headspace of it. All the information and content that you’re consuming, you can adapt or think through how you can apply it to that one thing. I would be doing a ton of validation at every step. When I first come up with an idea, I always think 90% this thing’s going to work. Then by 24 to 48-hour cooling off period before I register any domain, which is what I do these days, I wind up falling down to 10% or 20% certainty that this thing’s going to work.
Then typically I say, okay, what’s my next step to validate, how can I get myself to 25% or 30%? Oftentimes, it’s sending a few emails to people I know. It’s putting something on Twitter, asking opinions. It’s having face-to-face or in this case, these days, Zoom conversations. I might be putting up a landing page, driving traffic to it—whether it’s from my podcast, whether it’s from Twitter, whether it’s from running cold ads, which I did back in the day when we were validating Drip. I would just try to get that validation one step further, one step further.
That’s if I’m going to build maybe a larger, more novel product that doesn’t exist in the space today, and I’m trying to validate the idea itself. What if I know that there’s a gap in the WordPress plugin market, or that all the plugins that do polls on WordPress is just an example that they aren’t very good, or that I know that I can rank. It’s not that hard to rank high in the WordPress repository. There’s just a little bit of WordPress SEO. The algorithm is not as complex as Google. It’s not that smart.
Maybe I don’t want to validate that everybody needs a polling plugin. Maybe I want to validate that I can just rank higher. I get something in there or I email the top 10 poll plugins, especially the ones that haven’t been updated in two or three years, and I say, can I adopt your plugin or can I buy your plugin? These are ways that I would be going about. You don’t always have to build the thing from scratch, but the question of multiple or one, which should you focus on, in my opinion, unless you’re stair-stepping, and even with stair-stepping, I would focus on that. I was going to do an info product at the bottom end, or I would do that WordPress plugin or something as step one, and then I would build on it from there.
“How do you get your hair looking so good during a pandemic?” From Pat Foley. Thank you, sir. I did wear a mask and I get haircuts. That’s the honest answer. I had pandemic hair for the first four months because everything was shut down here, but we are still in—I don’t even know what—stage one lockdown where you can go to places. I went to the gym the other day. We wore a lot of face masks, but knock on wood, Minneapolis is not doing as poorly as many of the states around us. I appreciate the joking question, but that is the honest answer.
Question number two, also from Noah Bragg and MicroConf Connect. He’s following up on the above question. He says, ”If building your first tiny product like a WordPress plugin—” Hey, that was my example. I often say info products to WordPress plugin. There are Shopify ad-ons, there are Photoshop add-ons, there is a Google app store, Google Chrome store, things you can build. There’s a myriad of them. There are Magento ad-ons, we can go on and on. Anytime there’s an app store. Anytime there’s an ecosystem that has something that you’re not just battling to rank in Google for, these are the types of step one ideas I would encourage people to look at.
“If you’re building a first tiny product like a WordPress plugin, what level of customer research should you do? Is it more you see a problem and ship something? Or should you take a more cautious approach and try to validate further before shipping? I appreciate someone handing over money is the only real validation, but I’m trying to get an idea of how quickly you should move and whether it’s a case of trying lots of small bets. I hope that makes sense.” It does make sense. I would tend to act pretty quickly. I wouldn’t tend to do a bunch of customer validation calls or a bunch of customer development calls if I was going to do a small step one thing. I would validate almost in the Start Small, Stay Small approach. You go to startsmall.com, it’s my first book.
While the exact tools and exact numbers that I use there may not be accurate today because it’s 10 years old, the tactic there was you find a small niche or you find even not a small niche, but with an underserved corner that you can somehow measure the interest, whether that’s looking at a WordPress plugin and the repo and saying, oh, it has this many downloads. It must be a popular search term. Or you go to the Google keyword tool or you go to Ahrefs, or SEMrush, or Moz today and you say, oh, there are 5000 searches a month for this thing, and there are a couple of tools, but they’re not that great, or they’ve been abandoned.
There’s ways to validate just using free or lightly paid keyword tools and trying to find gaps in these markets. Even these days, there’s fewer gaps, but it’s places where people have launched and abandoned, or they’re not doing a good job and you see an angle. Then I would try to write some code quickly and move there.
Having a few customer development conversations or trying to figure out, hey, where do these people hang out that would use a plugin like this? Oh, they’re on Facebook. They’re in a couple of Facebook groups. Become a part of those Facebook groups and participate in them. They’re in these Slack groups. They’re in these forums. These discourse or discuss groups. There are ways to get this up to, I would say 20%, 30%, 40% validation, and to be able to write code and ship something in two weeks, three weeks.
For my bet, for my money, I’m probably going to write a little bit of code and get it out there. The learning starts with every bit of validation and frankly, getting something out there quickly in this—small niche is not the right word—but if it is a micro idea, I would lean towards action more than trying to validate for months and months.
Next question from Rami, he is King Ram Star on Twitter, “What advice would you give to someone entering a somewhat competitive market? Let’s say 5-10 direct competitors, which sounds ugly, but it’s less ugly than CRM, project management software, ESPs, marketing automation providers, where there are hundreds of players. Five to ten direct competitors, while that’s a thing, not the end of the world. More specifically, what would you do to out-muscle the competition when the resources are fairly equal, but the competition has social proof and social capital?”
I would not try to out-muscle the competition if I did not have a lot of money, or social capital, or social proof. You’re not going to muscle them. There’s this move in Jiu-Jitsu, or just the whole premise of Jiu-Jitsu is if someone has a bigger opponent than you, you don’t go head on with them and try to out strength them or out-muscle them because they will win. What you do is that you try to take their momentum when they punch you, when they lunge at you, and you peri and you use their momentum against them to get them on the ground, and then you grapple.
Similarly, I would use my opponent’s strengths against them. An example is you have 5-10 direct competitors. They have social proof and social capital. What are they doing wrong? Are you in their forums or their private Facebook groups? What are their customers complaining about? Where are they dropping the ball? Because companies that get to $1 million in ARR, $10 million in ARR, they tend to be leaving out sections of the market that they just have to ignore. They may be disappointing a certain subset of their customer-base or of their prospect-base.
It’s even better if you get big competitors because these are way easier to compete against. Companies like QuickBooks and PayPal. Think of Stripe launching at PayPal. Think of Xero launching at QuickBooks. Think of Drip launching against Marketo, Pardot, and Infusionsoft. They’re these big lumbering companies that aren’t shipping very often. They don’t have the amazing UX that you can build from the ground up. They aren’t just doing hand holding with their customers, they aren’t building the features that a subset or a vertical of the customer set might want.
I would start at the grassroots and I would start by trying to find 5 or 10 unhappy customers that I could interact with and say, what are you unhappy with? If you’ll get someone on the phone and they’ll just complain about everything—oh, the app’s impossible to use, and it’s too expensive, and no one listens to my phone calls, and I send them 10 emails a week and they don’t respond. That’s a toxic customer, they’re angry with everything all the time, they’re going to be unhappy with you too, goodbye.
But then you’ll get people who are, they’re pretty reasonable. They have ignored this corner of the market where photographers have special—I’m making this up. But photographers have special bookkeeping needs and their tax is calculated differently, and QuickBooks has just not listened. Suddenly it’s, oh, really? Who else could support photographers tax, bookkeeping, accounting needs? What other things have you tried to fix this? I’ve looked and there’s not an app that does this. Well, then it’s okay. Can I find 10 more photographers, or salon owners, or whoever it may be startup founders. That’s where I would start is, how do you find that subset if you have all this competition that is being left out.
The other thing I would think about, if you’re already in the space, you try to look for the hated competitor and become the opposite of them. If you can’t figure out a unique positioning—we’re the opposite of QuickBooks because we suck less, or we like QuickBooks but we’re for this particular vertical.
Think of SavvyCal. There’s Calendly and there’s all these big competitors. But look at what Derrick Reimer’s doing with SavvyCal. You go to savvycal.com to check it out. He’s basically saying it’s for busy startup founders and executives who have some pretty specific needs, and want to maybe guard maker time, and want to eliminate the awkwardness of sending a calendar invite. He’s taken a pretty specific tack there. He’s taking a unique position in the space. That’s one way. Another way in these competitive spaces is to have a unique traffic channel. That is, you look at what someone, maybe Ruben Gamez, is doing with Docsketch, which is e-signature, docsketch.com. It’s a terribly crowded space with literally billions and billions of dollars in market cap are in that space, and yet he has figured out a way to do amazing content marketing, amazing SEO, and just channel some of that traffic to where he is being highly successful in a competitive space.
To summarize, if I was going to go into a competitive space like this, I would look for a hated competitor. I would look for areas where that competitor is dropping the ball with either a specific audience or a specific group of people. I would look to position myself uniquely, or I would look for a unique traffic channel. With Drip, we had three of those four. Every one of those you have is better. If you only have one, you can still make it work, it’s just more of an uphill battle. Thanks for the question, Rami. I hope that was helpful.
The next question is from Garrett Lancaster, from MicroConf Connect. He said, “If you had a slow-growing $12,000 MRR, self-funded, B2B SaaS,” I love the specificity of this. “Doing about $150,000 a year, self-funded B2B SaaS, what questions would you be asking yourself?” I think he’s implying it’s slow-growing. What questions would you be asking yourself to get it growing faster? “How much do you think about retention versus conversion in this position?”
If my retention was not high, I have a problem. I’m going to use this phrase that is its product-market fit. I know that’s just a big, muddy, amorphous thing, but all it means is are people sticking around? Do people love your product? Do they stick around? Is your churn below 6%, 7%, your aggregate churn below that number? It depends on the price point, it depends on a bunch of stuff, but if you’re below 5%, then I would not be worried about retention now. I would be looking at increasing traffic and increasing conversion. The big question to ask is where’s the metrics gap? If you’re churning out 10%, 12%, 15% a month, that’s the number one problem. That’s what you have to fix before you do anything else.
That’s where I found myself when we were building Drip. We were a few months after launch and we had grown to $8000-$10,000 a month and we’re churning everybody out. That was a big retention problem. You can watch my MicroConf Talk, The Inside Story of Self-Funded SaaS Growth, I believe it’s called. It’s from, whatever, 2014, 2015.
If your retention is fine and people get on and then churn goes low for people, then, of course, it’s how much traffic, which your visitor-to-trial sign-up rate or visitor-to-trial should be, I’d like around 1%, if I’m asking for a credit card. I’d like about 15%, give or take, maybe 20%, if I’m not asking for a credit card. If I’m substantially below those, you have a trial conversion problem.
If I’m asking for a credit card upfront—trial to paid, I want to be between 40% and 60%. If I’m below 40%, I have a problem. You can look in the state of independent SaaS from 2020 and look at what other conversion rates are, or you can look at Craig Hewitt’s talk from MicroConf Europe in—was it just last year? It feels like 5 years ago. It was just last October. It’s something about viewing your metrics, maybe producers and they’re composed of that in the MicroConf Connect Slack. But he basically walks through rules of thumb and then says, these are the things to pay attention to if you’re below these rules of thumb. Otherwise, move on to the next thing.
At a certain point, my whole funnel is actually pretty solid. Now I’m just going to drive more traffic. I need to spend money on ads. I need to spend money on content. I need to do integrations. I need to go on podcasts, whatever it is, then let’s just see it. As you get more traffic, your conversion rates almost inevitably drop. Then you have to figure out how to then cater to those new folks.
The next question is still from Garrett. He says, “How would you go about offloading tier 1 customer support,” meaning frontline. Let’s say, it’s intercom chat, or it is usually just messaging or it’s email. “How would you go about offloading it when quality support/training is an integral part of your business model?” Everyone who asks this question says when quality support/training is an integral part of your business model—it’s an integral part of every early startup’s business model.
Much if I’m a developer, I write the best code in the world, I always feel like I can give the best support. In many cases, that’s relatively accurate. But how would you go about it? You find someone who’s really […] good. That’s what you do. You don’t settle for someone who isn’t going to learn your tool and who isn’t going to be ravenous about wanting to make people happy and learning your tool.
I had a non-technical, non-developer support guy that I worked with from, it was about 2011, 2012, all the way through when we were acquired. Then he worked with Drip through 2018, 2019. He was not a developer, but he figured out how to view source. He would go dig into people’s JavaScript and hack around in it. Obviously, on his client-side, he wouldn’t hack their website. I taught him how to use FTP. He learned how to edit HTML. He was just teaching himself this stuff.
He would sometimes ask me for a Loom, a quick screencast about stuff. For the most part, he went out and educated himself. In the early days, was he the fastest responder to tickets ever? Well, no because he was teaching himself stuff. But by the time he was working on Drip for a year or two, he knew the product. He knew how to answer support way better than any of us— way better than me, way better than the developers—and that’s the kind of person you’re looking for.
How did I find him? I went on Upwork and I went through two or three support people until I found a guy who was really good. He was working for a bunch of companies at once. He was doing 3 hours for me and 5 hours a week, then 10. Eventually, I said, I just want to hire you full-time, I was good to work with. We got along. We never did video chat, we never actually met in person. He lived in Mexico and that was it.
Many of you, if you emailed Drip, Andy responded to every support request for the first 3 ½ years of Drip’s life. I think it was 3 ½, maybe it’s 2 ½. Every single frontline support was just one guy, Andy. That’s what you do. That’s what I would do today. Hire good people.
The next question from Pablo in MicroConf Connect, “How do you feel about entrepreneurship being taught to children? Do you think it should be taught? Have you witnessed good execution of teaching children entrepreneurship?” I feel good about it with a caveat. My son had a course in eighth grade or maybe it was freshman in high school. It was teaching him stuff about intellectual property. It was trademarks and it was logos and he had to design a logo. We’re they teaching him everything we learned in MicroConf? Of course not. But did he learn some basics that he didn’t know the difference between trademark, and copyright, and some basic fundamentals? I thought that was good.
All of us in high school/college should learn something about entrepreneurship, something about how businesses work, something about personal finance, to be honest. Why is that not taught in school? Why do none of us know how the stock market works? You have to go do educate yourself. You have to go seek that out. How to just simply find a budget and stick to it. To me, it’s a real problem that is not taught to—whether it’s our children or probably our high schoolers.
We have Civics and Economics where we learn about the economy and nobody pays attention about the three branches of government. I’m only joking. Of course, people pay attention. But personal finance and something about entrepreneurship, they should be exposed to it to know this is what entrepreneurship might look like.
There are examples of people who are making caramels or cookies in a local kitchen and you could do a tech startup and raise funding or not. Do you think just being exposed to that would be super helpful for children? Yes, I do think it should be taught. I can’t think of an amazing example of anyone who’s done it.
I will give a spoiler that—I don’t know if she’s announced this—but Dr. Sherry Walling, my wife is writing a book called, Raising Entrepreneurial Children or something like to that effect. That’s the working title. Go to zenfounder.com and sign up for her email list if you want to hear about it. Of course, I’ll be talking about in the future. I may even contribute a chapter or two. Sherry and I had a ZenFounder episode a while back. Zenfinder episode in the first maybe 30 episodes that was all about raising entrepreneurial kids, if you want to check that out.
Next question, “What are things you notice that bootstrappers commonly overlook that are preventing them from achieving their goals?” A lot of bootstrappers overlook the fact that you have to market, that it’s not about building products. Bootstrappers don’t pay enough attention to their metrics, their analytics, or their metrics. They don’t even know what’s working. You ask someone a question and they say, what’s working is word of mouth. Word of mouth is usually the wrong answer.
There’s a lot of mistakes that people make. MicroConf talks point this out. I would say listening to Startups For the Rest of Us, even nugget.one, which is a pretty interesting website, Justin Vincent has a pretty interesting course there. There are definitely the common mistakes before finding an audience building before validating—not an audience—but a customer base building before validating. These are a lot of things that people do. People give up too easily. They build something, it goes to a plateau, and they give up instead of actually doing the hard work, it’s a lot more hard work than people realize.
Another question. This is from Vijay Goel from Chefalytics. He says, “What are some of the biggest takeaways you can see across your portfolio of early-stage SaaS companies? Is it one or two winners generating most returns? VC style? Is it steady progress by most? Will the majority be default alive businesses?” The answer is yes. The vast majority are already default alive businesses.
Every one of the 13 companies of batch 2 is default alive, pretty sure. If I were to put a number to 70% of batch 1, maybe 80% are default alive. So yes, default alive, all of them are making steady progress. Of 23 companies, there’s maybe two or three that are still not growing— two, three, four—it’s a small number. Maybe 10%, 15% are still trying to find that repeatable channel, still trying to find that repeatable customer base, but it is definitely steady progress. I don’t think it’s going to be winner-take-all. But, to be honest, I shouldn’t say I don’t think it will.
Einar did analysis of a bunch of SaaS apps. He got a bunch of anonymized data and he looked backwards over the last five years. If you do look at returns, it was not winner-take-all, but it was definitely a power law. Power law just means there is a small number who get 10 or 100 times larger than the others. In that case, yes, that era in that sense, yes, we may get there. I’ve been doing this for 15 years. There’s a reason MicroConf, and Startups for the Rest of Us, and my books, and TinySeed exist. It’s not to help the winner-take-all. It’s to help everyone. I want to raise the tide so all the boats go up. Yes, even if the returns are generated in that VC style winner-take-all, I will still be around and still be here to help everyone involved.
The question from Patrick Foley, “Have you ever built a business that got a fairly large portion of its revenue from services instead of products, but not just you consulting?” Yes. One I can think of, it’s called CMS Themer. It was a productized service before that term existed. It was at www.cmsthemer.com. I don’t even know if there’s a website there anymore. I ran it for about 18 months to 2 years. I acquired it from someone who wanted to shut it down. I knew how to rank it in Google. I got it to the top first page of Google for WordPress theming and some other things were present, Drupal and Joomla. Then I just had an agency—I believe they were in India—it was somewhere that I could outsource to for cheap. I marked them up 100%. I would charge $500 for you to send me a PSD, I would send it to my agency in India, they’d charge me $250 to turn it into a theme. I would send it back and make $500. It wasn’t a productized subscription service, but it was these one-off themes.
As custom stuff happened, we would increase the price. If you needed something more responsive back in 2009, it was obviously more money. Yeah, I have. It was fine. It was a little, quite a bit of hassle. I had that along with a bunch of software products and ecommerce and stuff. I’m trying to think if there are any takeaways I have from that. Productized services are a great way to get started quick these days, especially subscription services. You look at Audience Ops from Brian Casel, or you look at Podcast Motor from Craig Hewitt and there are other examples.
They get up to whatever $20,000, $30,000, $40,000 a month in no time. And then yes, you have to have a process in place, you have to have people to manage. It’s not a software product, but you learn a lot. It’s probably 70%, 80% the same as building a SaaS. Then Craig Hewitt levered it up to then acquire WordPress plugin to then build Castos and now, everything’s combined into one. It’s like a match made in heaven and it’s like a chef’s kiss to the stair-step approach in a way is building these businesses and building on top of each other.
And now one more question from Christoph Engelhardt, “How do you prepare financially or otherwise, for your retirement?” It’s a good question. I like personal finance. I’m a bit of a nerd with this stuff. Before I had sold Drip, I was contributing to retirement for most years—for both Sherry and I—putting them in the US. There are IRAs or 401(k)s.
I did stop. I will admit at the worst times of Drip, when it was growing fast and we had cash crunches, I stopped contributing to retirement. My bet was that Drip would make enough money in the end, whether through an acquisition or whether through throwing off cash, that it would make up for that. The bet worked out for me. It’s not going to work out for everyone. But by the time we sold Drip, I believed between Sherry and my retirement accounts, we had about $300,000, which I was in my late thirties. Is that right? I might’ve been in my early forties. I would prefer to have more by then, but when I looked at compounding and how it was growing, we would have had I’d say a couple million when we retired. But I also counted on having a lot more earnings and being able to put money in.
For me, it’s about saving early. I started contributing right out of college. In fact, if you can do anything for your kids, or nephews, or whatever—I’ll comment on the US because I know the retirement system here—but if there is a RHYTTAC-shielded retirement account, an individual retirement account called an IRA here, as soon as your kids get any income, match what they make, give and put the money. You can put up to $5500 as of this taping into a retirement account.
If you can put it in when they’re 15 or 16, compound interest is the eighth wonder of the world. I believe Albert Einstein said that. The earlier you get, if you invest at 15 versus 30, you get two more doublings of that, if you invest in the stock market. Put it all in high-risk stuff. I would be 100% in stocks. If you’re making 8% per year, then it’s going to double every 9 years. If you make 9% per year, it’s going double every 8 years. From 15% to 30%, you get almost two doubles of that. If you put in $5000, it becomes $10,000, then $20,000 by the time they’re 30. If they don’t contribute until 30, they have to contribute $20,000 to have the same impact that you do when they’re that young.
I started putting money in when I was 22, and just a little bit. I didn’t have much money. I wasn’t making much. I make $15, $17 out of college per hour. But I started putting $50, $100 a month away as early as I possibly could.
Thanks so much for joining me today. That is going to wrap us up. Thanks for hanging out with me a little longer. Last joke, can you imagine if one day MicroConf acquired Microsoft? Ooh, that was a misspoke. Can you imagine if one day Microsoft acquired WIWORK and named it Microsoft Office?
We do have some special podcasting stuff coming up soon. We’re going to have some voting and some nominations. I’m teasing that, so keep your eye out at microconf.com and thank you as always to Hey and Stripe for supporting MicroConf Headlines partners for the year. We love working with them. Thanks for joining me. I’ll see you next week.
Episode 522 | Revisiting Castos, One Year Later
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Rob welcomes back to the show a frequent guest, Craig Hewitt for a “Where Are They Now?” syle episode. Craig is the founder of Castos and has appeared many times on Startups For the Rest of Us. In this episode, they reconnect and talk about the latest with Castos, from hiring a growth marketer, merging brands, private podcasting, and so much more.
The topics we cover
[3:54] Reflections on hiring a growth marketer 1 year later
[6:92] How did the free trial without asking for a credit card experiment work out?
[8:92] Merging brands and moving into enterprise offers
[19:91] Private podcasting
[23:44] What’s new and exciting at Castos
Links from the show
- Episode 466 | Answering Listener Questions With Craig Hewitt
- Episode 493 | A Roundtable Discussion about COVID-19, Working From Home, Payroll Protection and More
- TinySeed Tales – Season 1
- Castos Productions (formerly Podcast Motor)
- Rogue Startups
- The SaaS Podcast Award
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Rob: Welcome to this week’s episode of Startups for the Rest of Us. I am your host, Rob Walling, here for episode 522. Every week on this show, I cover topics related to building and growing startups using an ambitious yet sustainable, sane approach. I know that you’re not willing to sacrifice your health or your relationships to grow your company, and yet we aspire to build an ambitious startup. Thanks for joining me again this week. I have a many time guest back on the show, Craig Hewitt, who has come on for Q&A episodes. He’s come on for a startup news roundtable. He’s told the story of his startup Castos, which went through TinySeed batch one. You could hear that complete story and detail across the first season of TinySeed Tales where we recorded eight episodes over the course of eight or nine months. You’ll hear this nice longitudinal look at his and his team’s journey as they focused on and grew the company during 2019. I wanted to have him back on today because someone wrote in and said, “I want a ‘where are they now’ episode of Startups for the Rest of Us that looks back and catches up from where Craig left off.” Coincidentally, almost to the day, it was one year since we had recorded the season finale of season one. I hope you enjoy the conversation we have today. Before we dig into that, I want to let you know about the SaaS Podcast Awards that MicroConf is holding right now. You can nominate your favorite podcast that has some affiliation or relationship to SaaS, whether it’s two SaaS founders talking about it or whether it’s people doing interviews. There are four categories of podcasts that we’re going to be looking at and highlighting. If you head to saaspodcastawards.com, you can enter your nominees for each category. In a few weeks, we will have finalists, voting, and eventually, we will present awards to the winners. This is the first of its kind. We’re really excited to be able to gather people together and hear what the people’s choice is for the top podcast and podcasts because it’ll be nice to have finalists to look at across each of these categories. Head over to saaspodcastawards.com to nominate a podcast. With that, let’s dive into my conversation with Craig Hewitt, the founder of Castos. Castos is podcast hosting and production plus private podcasting. It’s actually where this podcast you’re listening to is hosted, as well as TinySeed Tales and the MicroConf podcast. I hope you enjoy our conversation as we look back at the last year and hear where Craig and Castos are now. Craig Hewitt, thanks so much for coming back on the show.
Craig: My pleasure. Thanks for having me, Rob.
Rob: People will know you from Rogue Startups with Dave Rodenbaugh, your podcast, the founder of Castos and PodcastMotor, as well as the subject, the victim of TinySeed Tales season one. We recorded eight episodes back in 2019, got a lot of really good reviews and positive comments about that season just about our conversations, how open you were about sharing your victories, struggles, the journey of being a founder, and growing your company. You’ve also been on Startups for the Rest of Us at least two or three times. You’ve answered questions, I interviewed you about starting Castos and all that stuff. I feel like folks should have a decent idea of who you are and what you’re up to, but for those that don’t, Castos is the startup that you’re focused on. Obviously, you went through batch one of TinySeed. We’re talking offline that before season one of TinySeed Tales, as we started recording it, you were at four full-time employees and now you’re at eight. You tripled in revenue, you’re already in the five figures of monthly revenue when the season started. Over the course of that—I don’t remember how long we recorded, it was about eight or nine months—basically, you tripled on revenue and you haven’t raised any additional funding. You took funding from TinySeed and used that to truly catapult forward. You hired a growth marketer named Denise, who I know has worked out really well. Recently, you hired Matt Medeiros who folks may know from the Matt Report, and he’s your Director of Podcaster Success. A ton has gone on. The last time we spoke to record the final episode of season one of TinySeed Tales was almost one year ago today. It was October 30th of 2019 and as we’re recording today, it’s November 4th. With all of that, welcome to the show. Thanks for coming back on. I’m really excited to dive into what’s been going on over the past year.
Craig: First of all, I can’t believe that we only recorded eight of those episodes. They were intense emotionally—for folks listening to follow that story—because we had a lot of ups and a lot of downs. Hearing that that was only eight episodes makes me feel old and makes me have more gray hair from that, but that was a lot of fun.
Rob: It feels that way to me too. I know 8 aired but it feels like we recorded 16 and I don’t know why that is. I think it’s just tough times.
Craig: It’s just an intense time we’re in, right?
Rob: It was. It was pre-COVID and everything. The death of George Floyd hadn’t happened yet. COVID and this very stressful US presidential election that is happening right now, that wasn’t happening. It really was a lot of business stress on you and a pivotal point in the business.
Craig: Absolutely.
Rob: The way I want to do today is I want to revisit a couple of things that we talked about in the final episode of that season, and then talk about some secret audio. You and I recorded about 10–15 minutes where you were talking about some top-secret future plans you were going to do, but you didn’t want to air that because it’ll give away your strategic move. We’re going to pull some snippets out of that to air because now that it’s been a year; you’ve already done those things. And just talk about some recent developments, basically, with Castos, what worked and what hasn’t. Just do a ‘where are they now.’ I want to kick it off with, during the season of TinySeed Tales, you took a big gamble. We took a couple of big gambles, actually. One, you hired a growth marketer. You went all-in on getting someone to hand off marketing to. That was a challenge for you because you had been the only marketer. You had basically written all the copy and just been in-charge of the strategy and all that. You made a difficult transition during the season of starting to hand this over to her. In the end, it was a resolution of yes, that worked, that was smart, and it was working at that time. A year later, I’m curious to hear your reflections on how that’s been going.
Craig: A year later, it was a fantastic decision. We hired the right person for sure. Denise is wonderful at her job. She is very skilled, very detail-oriented, and is becoming a really strategic thinker from a marketing perspective, which I think is the thing that has changed the most. She would probably be the first one to tell you that she came in without any kind of SaaS marketing experience and now is very savvy in that respect. All the way, up and down the stack or the funnel if you will. We talked about this being the goal. It allows you to move your energy and focus on the business and where you operate. We have a weekly marketing meeting and we chat. Now it’s Denise, Matt, and I because Matt, even though he’s tied as a Director of Podcaster Success, he comes from a sales marketing background. He’s a lot of product and podcasting domain expertise so he’s definitely involved in a lot of the marketing stuff that we do now. I go to that meeting and we talk a lot of really high-level strategy stuff. The two of them go and execute almost all of it now. It’s great because what it does is just put you on a different trajectory than if you do it all yourself. It really is what we wanted. Denise wakes up and thinks about how to grow Castos every day. I do, too, but I think about a whole bunch of other stuff. I think the more that we can let someone focus on doing a single thing—and we’re only eight people so nobody can do just one thing—the more we can get to that, the more successful they are at their jobs. That moves the needle for us, the business.
Rob: That’s good to hear. Of course, we know you update us with what’s going on. I knew that was the story but it has been so fun for me to listen back to the season and hear you put out the job description. You had a process for hiring. There’s always uncertainty, there’s always like, I think this person’s right, will it work? It’s nice when it works out that well. We hired the right person because there can be that paradigm shift or that one plus one equals three or whatever cliche you want to use. It just levels you up so much more than you probably even expect.
Craig: Even more, the other path there could be let’s hire a content marketer just to write, let’s hire an agency to run Facebook ads, let’s hire a copywriter to do this landing page, but I’ll be the glue to hold it all together or the person to coordinate it, and that just still requires a ton of your mental energy. Whereas you can say, hey, Denise, you own this part, this outcome of the business. I am here to support you and the company’s here to support you, but I need you to be the one that thinks about this all the time. It’s just a very different kind of way to work.
Rob: Absolutely. I’ve been struggling to find a name for all three of these but I talked a lot about how in the early days, I had a lot of task-based people. It was usually VAs who could do a specific task. That’s like hiring a copywriter, go do this, you’re really good at this, but now, I’m managing it. So, task-based people, project-based people, and owners. Originally, I was thinking of founders, but really I should say it as task-mindset, project-mindset, owner-mindset. That fits who can really own this whole area—maybe even delegates and projects—but be thinking about where a task-based person might think ahead of the next week, a project-based person thinks ahead for the next month, and as an owner thinking 6–12 months out or maybe even two years. They don’t have to technically own. It’s not about equity and business, but I think it’s about owning the key results, really planning, presenting, and certainly taking input. As an owner, you don’t just do everything yourself. Finding those types of people is hard but it’s what you need to really level up a business, especially at your size. With eight full-time employees, everyone has to be really good or else it’s a huge drag on the company.
Craig: Somewhere that we’re just getting into with maybe that next step of ownership is that the leaders of each group of our organization are involved in hiring. That is super cool to see. We hired a full-stack developer recently. Jonathan, our lead developer, was the final say on who we hire basically. We’re hiring support personnel, and Matt on our team is going to be the final say on who we hire there as that last interview. That’s super cool to see. In respect, it takes some of the burdens off of me because I basically get a couple of people through the process and say, I’m happy with any of them. you go pick. Also, because they feel super empowered to be making that decision, and they know they have to live with it afterward. That’s a really good thing. That’s not a negative thing. We’re just getting into that. We’re just in the second iteration of that step but it’s really cool to see.
Rob: Something else you did during the season was you had a credit card upfront in order to get a 14-day free trial of Castos. During that, this season, you removed it. That just sends all your metrics all over the place. I remember it was a little bit mixed in the end where you said, yeah, it’s better but not enough that it totally makes sense. That was my memory of it. Is that still how you feel about it? You’re still not asking for credit cards. Obviously, it’s a better way to go, you’re getting more leads. Do you feel like that was a huge win? Was it awash? What are your thoughts looking back?
Craig: I think it has been a good thing. It’s tough to tell over. I haven’t gone back and looked at our month-over-month metrics from a strictly growth perspective to say whether in that kind of shorter-term it was a really good thing, but from a user perspective, especially in something like podcasting—Rob, even though you’ve been doing this forever—it’s hard to get started. You might need more than two weeks to really get your show off the ground. What we found is that people come in, they give it a try, we give them a chance to extend their trial even if they want to right at the end. From a compatibility with the user behavior perspective, not asking for a credit card upfront is definitely the way to go. We have no plans of changing it at this point. For users, it’s the right thing to do.
Rob: Something you talked about in the final episode as we wrapped was I said, what’s next and you said, we’re looking at offering a freemium tier, basically a pricing tier that has a max usage-based freemium. I think it was what I referred to it as. From what I know, that never happened. When did you make that decision, and what was the thought there of not introducing that free tier?
Craig: Most of it came down to engineering resources. I hate to say this. If it was just a flip of a switch in Stripe or something, I probably would have tried it but it would’ve required a bit of work on the back-end to get that implemented. We just had other things we wanted to do, features to build, UI to improve, and things like that so I just didn’t feel like it would move the needle in a significant way. Maybe looking back on it now, that’s because the no credit card trial thing didn’t move a needle a ton so I thought that a usage-limited trial might just give the same type of result. Coincidentally, we may be looking at it again but for different reasons.
Rob: It’s always hard to spend a lot of engineering time or a lot of your time making a change like removing a credit card and have it be. Maybe that was worth it. I definitely understand why you’d be hesitant to go freemium knowing that you could get something else built in that time that you’re pretty confident will move the needle, and Freemium is just such an experiment. It’s such an experiment and it’s not a few weeks of work. Even if the engineering time is only 3–4 weeks, you get to the point where, okay now we’ve done it and now we need to watch it for months because freemium doesn’t convert in 30 or 60 days. You have months and months. If you have other things that are working, it can be a tough sell to justify that. The last thing that you talked about in that episode was you were thinking about whether you should move a little more into enterprise-type offerings, that the average revenue per user of a podcast host is not great. It tends to be a commodity thing. If you look at all the podcast hosts, they’re not priced that high. You were noodling on whether or not you wanted to get into that space, start selling to enterprises, and have some offerings that really made sense to be higher priced. After the episode, you and I recorded that little secret audio that we can cut to right now, and had a little bit of conversation about something you were thinking about to raise your average revenue per customer. During the TinySeed retreat at MicroConf Europe in Dubrovnik, we did a hot-seat format. That’s typically how we do it, right? We go around and each founder gets 30 minutes to think through a pretty challenging difficult issue to get feedback from the batch, as well as myself, Tracy, and Einar. Something came out of your hot seat that could potentially change the trajectory of Castos. Do you want to talk a little bit about that?
Craig: Yeah. It’s funny, my talk at my MicroConf Europe was about SaaS metrics. All along, ever since you and I started talking about this business, the metric around Castos that has been the worst, that’s tough to a fact just like our average revenue per user. We’re just not a hundred dollar a month kind of app. I don’t know that we would ever be for the majority of our customers. We started thinking about what people would pay $100 or $200 for. Pretty quickly, the answer came to be audio editing either as a service or a software tool. The value in a software tool is incremental. We’re talking in a previous episode about incremental steps versus big major steps that would double or triple the size of the business. Building software to help people edit their podcast is cool but not that cool—doing it for them is really cool. I happen to have a lot of experience in this from another business in the space. The idea is can we take that other business called PodcastMotor and roll that service level into the Castos platform, or make it super easily accessible to all the Castos customers? It was a really interesting thought exercise. I think that everybody who’s running a business should say, how can you double your business tomorrow, and just come up with crazy ways to do it. At first, this seemed really crazy. About an hour and a half later, I was like, yeah, that’s totally the way to go because it’s a natural progression for a lot of our customers. They come in and start a podcast. They have some degree of success with it. They want to keep going with it. They say, wow, editing all this audio sucks, and it takes me two or three hours every episode, I would love to pay somebody a little bit of money to do that for me.
Rob: For folks who don’t know what PodcastMotor is or how it works, could you give just a few sentences on how good of a fit it actually is for exactly what you want to do here?
Craig: PodcastMotor is a productized service that I’ve been running for 4½, almost 5 years. All we do is podcast editing, we do show note writing, we have a transcriptionist team. The idea really is a show like this records their episodes, sticks the files in Dropbox, and then we do all the work from there. We do audio editing. We do show note writing. Then, we publish to a website media-hosting platform. We could build a fair amount of automation around that part of it, about the publishing part of it, but certainly, it takes all of the onus of the post-production side of the world off of podcaster’s plate, to let them focus on other more important stuff like marketing and growing their business.
Rob: You have this unique experience that likely no other podcast host has. This is where you started with this productized consulting. One of the things during the hot seat is, as we were talking about it, I said, you could just make it your highest tier. You have a $19 plan, a $39 plan, and then just have a $1000 plan—I had just thrown out that number, made the numbers up—and that one includes full-service production, editing, and such. We were mulling that over and it was like, wow, this has been really interesting. One thing I said was, yeah, but the problem then is if you get a bunch of new customers, you have to scale. Now you have to hire editors and you have to hire transcriptionists. You looked me in the eye and you said that’s not that hard. To me that is hard, but to you, it’s not. You’ve been doing it now for years, and you have an amazing process to accomplish that.
Craig: The place this really makes sense is in the scalability of it. Because we have been running this business for a while, we know how to hire and vet people, bring them into our process, onboard customers, and things like that. At the scale, we would hopefully be talking about within Castos or expose to the whole Castos user base, new trial customers, and things like that. They would need to be a little better because we have 50 customers on the PodcastMotor side of things now. We could probably have 500 as part of this combined business. It’s nothing if one of our competitors decided today that they wanted to start a PodcastMotor-type of business tomorrow. They would have the years of headaches that I’ve had so far before they could get to where we are.
Rob: It’s a fascinating competitive advantage. I’m surprised that none of us thought about this sooner. I’m including myself in there, you, Einar, and just anyone in the batch that we never thought about enough to think about combining these. Why do you think that is?
Craig: A little backstory, I guess. The first version of our hosting platform was still under the Seriously Simple Podcasting brand. It was on the seriouslysimplepodcasting.com site and all this kind of stuff. We went through a rebranding exercise to become Castos. Part of that rebranding consideration was, why don’t we just call it PodcastMotor? For a lot of reasons—this is one of the decisions we have to make now—it gets difficult to discern between the editing service and the hosting platform if they’re all under the same roof. We’re going to move forward with this integration to bring the two companies together, but they might still have separate websites. They might just be an integration partner that ultimately all the money still goes in the same bank account. That’s the reason we didn’t put the hosting platform under the podcastmotor.com brand before. We had some concerns about what do people who know PodcastMotor as an editing service come in and see this hosting stuff, what are they going to think? I had definitely thought about combining the brands before, and then made a decision to treat them as separate entities. One because of branding, messaging, and things like that. The other is, like Thomas Smail says, one day you’re going to sell your business, or you’re going to end your business. I wanted to have some optionality and keep them separate so that I could do different things with each of the businesses. I didn’t then think that the combined entity together of both facets of the business was as strong together as it is. That’s probably the thing that I got most out of our discussion, with talking with you, Tracy, Einar, and everyone else. The valuation of this combined company is still really, really strong, whereas the valuation of just a service business maybe isn’t as strong. And the value proposition of, hey, you can come in and we can provide now, the two big huge things that a lot of podcasters need. We’re going to check three of the four or five big boxes in podcasting all in one house.
Rob: You were basically talking about merging PodcastMotor into Castos. Or at least, you were talking about offering editing through Castos because there’s a higher price point, higher average revenue per customer. You talked a lot about not merging the brands potentially, and not merging the websites. It seemed like you were uneasy about that. Talk to me about what’s happened over the last year with PodcastMotor and Castos.
Craig: In the spring of 2020, maybe in the fall of last year, we introduced Castos Productions which was, at that time, a white label version of the PodcastMotor service from within the Castos dashboard. You upload your raw recording files or you send us your Squadcast links like we would do for this episode, then the PodcastMotor team on the backend does the editing, show notes, writing, and production work. That went over well. We had a good reception from clients and from our advisors. People just kick in the tires and say, yup, it makes all the sense in the world to put that all in the same place. I’m happy to do that. So July of this year, we formally merged the companies and started the process of migrating those existing PodcastMotor customers over to using the Castos Productions workflow, to manage all of their podcast stuff in the Castos app, both the production work, hosting, distribution, and analytics all in one place. Then, we took the really big leap which was to merge the brands—naming and the websites—just maybe six weeks ago. If you go to podcastmotor.com today, you’ll go to the Castos productions page on castos.com. Overall, it’s been really successful. Rob, you and I talked offline about the decision to do this. For a lot of reasons, managing just one brand generally is a lot easier from an SEO perspective. It definitely is better to have all of your links juice pointing to one place. There will be people that say, yeah but if you were two brands you could have multiple listings on the first page of Google for a term. That’s the case, but generally, we think we can rank for more terms as a single site, so that’s what we’ve done. Generally, the only thing that we knew we would have to do and I think we’ve done a good job is to manage that legacy PodcastMotor name for people that know us or were customers of ours before and want to come back to do another season or something. On that page, on that Castos Productions page, we reference PodcastMotor. We have a banner at the top of the page announcing that PodcastMotor is now Castos Productions and links to an internal blog post that we have about it. I think that’s the thing that I was the most scared of is what is like a really nice brand? The PodcastMotor brand and the job we do there was really great, so how to transfer as much of that over to Castos Productions as possible? The thing that you and I talked a lot about was the thing that gave me pause before and that we’re keeping a very close eye on now that that move is taking place.
Rob: This is one of those decisions that I think is the right decision the way you did it. Correct me if I’m wrong, but I believe I gently nudged you in that direction of my gut based on things I’ve seen, and where you are is that you should fully merge. There’s more power in it, there are more SEO powers, and there’s more brand power and all that. I’m not like it’s 100%. You absolutely have to do this. It’s the only way to do it. I do think there are nuances as you said, but I feel like it is the right decision and has been the right decision from my outsider’s perspective. You’re six weeks post doing it, so obviously you only have so much perspective at this point. Do you feel so far that it was the right choice? Do you have any regrets about merging those two brands?
Craig: It’s definitely been the right choice. I don’t have any regrets. I think the reason is if you look at the potential plus and minus of it, the plus is that everything is in one place. It’s one brand. Messaging should all be really clear around this. The downside is that last part maybe, with two separate brands, you can be more clear and opinionated about what that messaging is. When they’re all in one place, it can get a little more muddled and a little more difficult to be really explicit about what a brand is. Now, Castos is podcast hosting and production, whereas before it was just one thing. I think the positive of having it all in one place. Having these professional services in front of all of our customers is just way above that potential difficulty and messaging.
Rob: Right and it’s such a differentiator because no one else is doing this. Where else can you go to get hosting, to get editing and production, all the transcripts, the YouTube stuff, and just all the things you do? It is a unique space in the market. I’m excited to see where that takes you moving forward. How hard did it wind up being? It’s funny we talked about a year ago and you said you got done with it six weeks ago, surely you weren’t working on it for ten-and-a-half months. It must’ve been starts and stops.
Craig: It was a lot of starts and stops. I probably just forgot about it or it wasn’t a huge priority for a while. I think we really saw some good traction with Castos Productions when it was just a white label version of PodcastMotor. We really thought, time to get more serious about it because at that point we really had three brands. That was too much. I decided to bring it all together. It’s a fair gamble because we talked about reversible decisions. I don’t think that’s a reversible decision. We’re down this path. That’s a 301 redirect like that stuff to take back. We tested the waters with it too. I felt like we had some data well before we did all the stuff in July.
Rob: That’s the thing. I have a question here. Has it moved the needle yet? I’m not totally sure what I mean by that, but I guess I’m thinking you bring over this brand and this new service, and you would hope that new customers or existing customers would adopt it in a way that maybe they wouldn’t have if you kept those two apps separate.
Craig: It’s definitely moved the needle. First, all of our revenue code goes into one place, that’s great. That’s just easier to keep track of and everything. The thing that it does is that it simplifies our messaging a lot because instead of me being on sales calls for Castos Productions and for PodcastMotor, I’m on one side of sales calls. We have one set of pricing, we have one set of offerings, and in that respect, it’s definitely improved our positioning. But it’s still an ongoing thing. It’s still something that we are continuing to refine the experience, the actual user experience, positioning, the pricing, and all of this, which is cool. It’s another lever we can turn and that’s fun to have.
Rob: Yeah. What I love about it is this concept of a dual funnel that I keep bringing up of having this wide, lower-cost funnel. We have a lot of people coming in. Maybe it’s freemium, maybe it’s a credit card or whatever but when you’re getting hundreds of trial sign-ups or even into the low four figures of trial sign-ups in a month, that’s a very wide low touch, low-cost funnel usually with low average revenue per customer. You can build a good business on that. You want to raise average revenue over time. That’s a low touch funnel. Then, there are high touch funnels where you’re selling for $500 or $1000 or $5000 a month and more enterprise stuff, long sales cycles. You can build a business out of there. The dual funnel, when you have a SaaS that has both of those, that’s amazing. Those are the apps that I’m seeing grow the fastest right now. I think back to even in the Drip days of our starting price of $49 and eventually, we had a $1 plan and then a free plan. We had people coming in and saying I’m going to pay $1000 a month or $1500 or $2000 a month. That’s a nice dual funnel. You do have this amazing brand, you have the reach, and your word of mouth because you can have thousands or tens of thousands of paying customers on the low end. Even if you only have 50 or 100 or 200 larger customers, it can become the point where the vast majority of revenue actually comes from those because they pay you such an overwhelming amount of money. A lot more apps out there are like this than people realize. A lot of the apps we use that are inexpensive actually make a ton of money. Slack’s another good example or Zoom where they have this free plan. They have a wide funnel. Everybody knows who they are and if you’re a small company, you pay Slack $6 or $8 a month per employee. My team is a team of five. I’m paying them $30. That’s not a great average revenue per customer for a company that wants a multibillion evaluation. But IBM, Microsoft, or whoever—I guess Microsoft has their own product—insert Fortune 500 company here who doesn’t have a competing product, are likely paying Slack $10,000, $20,000, $30,000 a month. That is the dual funnel that allows them to grow incredibly fast. That’s what you’ve introduced here. You essentially still have this great product with this great low-end price point. Great for consumers, not for your average revenue per customer but great for your customers, and you do have a mini brand with thousands of people that use it. Now, you also have this high-end enterprise offering and that brings that average revenue per customer up pretty substantially.
Craig: Yeah. We’re now getting into the third leg of that stool which is really cool. It has its own messaging challenges but we are having conventional podcasting, podcast editing as a service, and then private podcasting that is in some ways a whole other animal, a whole other product and whole other type of customer but is very interesting both from a revenue perspective and from a business and product and where we are on the market perspective. It’s cool and challenging at the same time.
Rob: I’m really interested to dig into this because when you talked about building private podcasting, the first thing I asked was is anybody else doing this? Why would you do it? I’m not sure I understand it but you guys are essentially on the leading edge of this. You’re stepping out. This is a novel, new entry into the market. That’s the thing. I was thinking, I’m sure it’s aimed at (I can imagine) any Fortune 5000 company might want a private podcast for their sales staff or for their employees in this day and age of working remote, but I could also see Startups For the Rest of Us having a private podcast that people pay a Patreon or a subscription for. I can see MicroConf having a private podcast for people who go to this event or for the Connect Slack Channel with only them. Or how about a TinySeed private podcast only for investors or only for mentors? Am I making this up or is that where it’s headed?
Craig: It’s literally anything you can imagine. We have mental health professionals having private podcasts for each of their patients. We have Fortune 100 companies that we’re working with having internal private podcasts for their sales team or for their HR groups. We also have enormous health and fitness brands having private podcasts as an extension of their membership site or their course. That’s tens of thousands of people coming in. They have a course or they have a membership site. They have content there and they want to add podcasting as another way to connect with their tribe or their members. We are really uniquely positioned. One, from our WordPress integration, that a lot of people do this membership type stuff in WordPress, so we’re a natural fit there. We also have some native integration with membership platforms like MemberSpace to where new members start paying you for access to membership sites. That person automatically gets added to a private podcast in Castos. All totally automatic that you as membership site administrator don’t have to do anything and you’re able to offer this to your members, which is a huge value. I think it’s just such a natural fit. Now that we’re here I think of course, why didn’t we do this a few years ago? Rob, it might be like what you saw with Drip where you weren’t ready, the market maybe wasn’t ready. Now—knock on wood—I feel like we’re at the right place at the right time with this because it’s a huge opportunity and people come to us and they are absolutely thrilled that we do this the way we do. That makes me feel really good.
Rob: It’s easy to think like a product person. The next feature I launch is going to be the one that changes it. Most times it’s not, most times you try to market it and it’s ho-hum. But this one seems to have really resonated in a way that I’m not sure I anticipated when you were talking about it. I’d hope that it would bring in the Fortune 1000 or 5000. You can charge a lot more for this because it is a premium feature, but the conversation you’re having with people on the interest of this, it sounds like has been really strong. Did you expect that or were you a little bit questioning or tentative about it? I know you were all in on building the future but did you expect it to have this level of interest?
Craig: I would be lying if I said of course I knew that this was going to happen. Of course, I was very hopeful, but I think you don’t know when you’re expanding the edge of what people expect from an ecosystem and a platform, and the behavior that they have with something like podcasting or email marketing. It is when you say you can charge money for a podcast directly or you can only offer this podcast to certain people. Even today, folks are saying that’s not a thing and you explain it to them. They go, of course, that totally makes sense. I can imagine doing this for X. When we started to have some of those initial discussions, then we had more confidence in it. We did a fair bit of collecting email addresses and chatting with folks. We had some people on the platform from day one that was duct-taping this together with Zapier and the membership platform and stuff like that but didn’t have that last piece of individualized private RSS feeds from the hosting provider. That’s what we are providing.
Rob: Right, so you can revoke access in essence when it happens. Congrats on getting that life and certainly stoked to hear about the interest. Obviously, as an investor through TinySeed, it’s nice to see when things go right and I get to live vicariously through your victories, which is fun to be along for the ride. I do want to congratulate you as we move to wrapping up. I want to congratulate you on hiring Matt Medeiros as your Director of Podcaster Success. If folks have not listened to the Audience Podcast and if you are interested in starting your own podcast, or growing your audience, or learning how to monetize, or all the tech stuff around podcasting, search for Audience in your podcatcher. I listen to every episode that comes out. It’s a really high-quality show. I can tell that Matt has pulled a burden off of you because I know that you were putting that out every week and I know it was a ton of work for you.
Craig: Yeah. It’s funny. Just before recording this, Matt and I recorded an episode and talked a lot about this, him coming on board, he is a better podcaster than I am and has been doing it for longer and it’s been awesome to bring in a total A player to own that part of the business. As an entity of the podcast, it’s much better off primarily in his hands. It’s been cool.
Rob: That’s a double win when they can do it perhaps a little bit better than you can and that you get the time back. You don’t have the mental burden of, what am I doing because producing content like this is fun, but it does take that good glucose. It takes that creative energy that you can’t put into writing copy or doing other harder things. As we wrap up, I want to hear what you’re excited about right now. What’s new with Castos? Whatever this week or this month? What’s kind of the big thing that gets you excited?
Craig: We have like two real initiatives that were driving hard on. One is doing everything we can to be the obvious choice for people who want to create a podcast and use WordPress as their website. Specifically what that means is we’re launching an integration with Elementor by the time this goes live. This will be out so you can manage all of your podcasts, design, contents, player, everything from the Elementor editor. Elementor is the most popular page builder for WordPress, so we’ll fit directly into the Elementor editor and all of your podcast stuff happens right from Elementor. That is super cool and hopefully opens up a chance to do some co-marketing and brand exposure between organizations. We’re doing more things in that kind of vein of the businesses, just doing cool things and offering good free tools for people on WordPress to make that experience even better. The other one is private podcasting. It takes a lot of different forms. I talked about courses and membership sites but also for internal company podcasts and working with real enterprises and what that looks like. The question mark still—we might have talked about this last year—is Castos directly being able to be the payment processor via Stripe, a way for you to charge money for your podcast directly. That’s still a bit of a question mark. I think it’s a question mark from a strategic perspective because I think about podcasting as a hobbyist and an aspirational thing, I can imagine a lot of people coming into a tool like this, like Substack. I imagine Substack has an enormous number of people that don’t make any money from their newsletter. If you think that what we’re talking about building with premium podcasting is the same kind of thing, you’re going to have a bunch of people coming in, making content, charging money for it, and not making any money. That’s just how it goes. It’s tough to build a community and a following online. It’s even harder to get those people to pay you money having the micropreneur academy, FounderCafe. We’ve taken the approach so far of let’s help people that already have a significant following, and integrating with their course platform, their membership site, or their community, and offering podcasting as something that they add-on at an additional way to that. From a project strategy perspective, I don’t know if going directly to people that want to charge money is the way to go. I’m sure we’ll do it but I think we’ve made the right decision so far to say let’s use the audience we already have and the membership tools that they’re already using to manage those members and payments and things like that and us be the podcasting tool that adds on to those, as opposed to having to—from a product perspective—create the whole stack and maybe have people come in that, think they can build a community, and charge people money for it because I think it’s just really, really hard. We’ll see.
Rob: The aspirational people will come but I think you can get around that with pricing. I’m just going to throw up pricing. If it’s $99 a month plus whatever for downloads or something then you’re not going to get as many aspirational because they’re going to say that’s too expensive. If I had MicroConf as an example or Startups for the Rest of Us, $99 a month is a no brainer for us. Certainly for whoever, Target, General Mills, and Best Buy, these are just Fortune 500 companies that are here in Minneapolis that I was thinking of. For them, it should be even higher. I guess Best Buy, Target, and General Mills are not going to charge their people. That would only be for someone more like Startups for the Rest of Us or MicroConf if we did decide to make that a paid thing. Again, if you just keep that minimum price at a certain point, because you’re not a commodity right now. You’re such a unique offering that if people want it, they need to come to Castos. Once the feature is going to get cloned, you get copy cats, they probably won’t build it as well as you guys have. Eventually, it will get to that point and you have to make that decision of, do we want that lower-end of the market, the aspirational people, but I guess you can make that decision when you get there. Is it something you feel like you could solve with pricing by just having that higher minimum per month?
Craig: I think so, but I think that all that does is it doesn’t attract the aspirational folks that don’t already have that audience or don’t think they could get that audience. The thing that I’m most concerned about is this resource allocation of it’s a month’s worth of work for a developer at least to build all this stuff, could we go do something better with that?
Rob: I want to see it that you have ample leads coming in on that higher-end that want to charge for it. If you’ve only had a handful come in then I don’t know. If you haven’t lost a deal because you don’t have it built-in and it’s a month of work, that’s tough. Given how fast you have to move and how much you’re building, it’s a tough decision to make.
Craig: That’s definitely a question mark. It would be super interesting but I’m not sure.
Rob: Well, awesome man. Thanks again for taking an hour and hanging out with me here again on Startups for the Rest of Us. On Twitter, you are @TheCraigHewitt and obviously castos.com if folks want to see what you’re up to. Thanks so much for joining me again this week. I hope you enjoyed that conversation with Craig. I’ll definitely have him back again in the future. He always has interesting insights, is moving so fast, and doing so many interesting things that it’s pretty easy to bring out essentially good conversation and good content for here on the show.
Craig: My pleasure. Thanks for having me, Rob.
Rob: People will know you from Rogue Startups with Dave Rodenbaugh, your podcast, the founder of Castos and PodcastMotor, as well as the subject, the victim of TinySeed Tales season one. We recorded eight episodes back in 2019, got a lot of really good reviews and positive comments about that season just about our conversations, how open you were about sharing your victories, struggles, the journey of being a founder, and growing your company. You’ve also been on Startups for the Rest of Us at least two or three times. You’ve answered questions, I interviewed you about starting Castos and all that stuff. I feel like folks should have a decent idea of who you are and what you’re up to, but for those that don’t, Castos is the startup that you’re focused on. Obviously, you went through batch one of TinySeed. We’re talking offline that before season one of TinySeed Tales, as we started recording it, you were at four full-time employees and now you’re at eight. You tripled in revenue, you’re already in the five figures of monthly revenue when the season started. Over the course of that—I don’t remember how long we recorded, it was about eight or nine months—basically, you tripled on revenue and you haven’t raised any additional funding. You took funding from TinySeed and used that to truly catapult forward. You hired a growth marketer named Denise, who I know has worked out really well. Recently, you hired Matt Medeiros who folks may know from the Matt Report, and he’s your Director of Podcaster Success. A ton has gone on. The last time we spoke to record the final episode of season one of TinySeed Tales was almost one year ago today. It was October 30th of 2019 and as we’re recording today, it’s November 4th. With all of that, welcome to the show. Thanks for coming back on. I’m really excited to dive into what’s been going on over the past year.
Craig: First of all, I can’t believe that we only recorded eight of those episodes. They were intense emotionally—for folks listening to follow that story—because we had a lot of ups and a lot of downs. Hearing that that was only eight episodes makes me feel old and makes me have more gray hair from that, but that was a lot of fun.
Rob: It feels that way to me too. I know 8 aired but it feels like we recorded 16 and I don’t know why that is. I think it’s just tough times.
Craig: It’s just an intense time we’re in, right?
Rob: It was. It was pre-COVID and everything. The death of George Floyd hadn’t happened yet. COVID and this very stressful US presidential election that is happening right now, that wasn’t happening. It really was a lot of business stress on you and a pivotal point in the business.
Craig: Absolutely.
Rob: The way I want to do today is I want to revisit a couple of things that we talked about in the final episode of that season, and then talk about some secret audio. You and I recorded about 10–15 minutes where you were talking about some top-secret future plans you were going to do, but you didn’t want to air that because it’ll give away your strategic move. We’re going to pull some snippets out of that to air because now that it’s been a year; you’ve already done those things. And just talk about some recent developments, basically, with Castos, what worked and what hasn’t. Just do a ‘where are they now.’ I want to kick it off with, during the season of TinySeed Tales, you took a big gamble. We took a couple of big gambles, actually. One, you hired a growth marketer. You went all-in on getting someone to hand off marketing to. That was a challenge for you because you had been the only marketer. You had basically written all the copy and just been in-charge of the strategy and all that. You made a difficult transition during the season of starting to hand this over to her. In the end, it was a resolution of yes, that worked, that was smart, and it was working at that time. A year later, I’m curious to hear your reflections on how that’s been going.
Craig: A year later, it was a fantastic decision. We hired the right person for sure. Denise is wonderful at her job. She is very skilled, very detail-oriented, and is becoming a really strategic thinker from a marketing perspective, which I think is the thing that has changed the most. She would probably be the first one to tell you that she came in without any kind of SaaS marketing experience and now is very savvy in that respect. All the way, up and down the stack or the funnel if you will. We talked about this being the goal. It allows you to move your energy and focus on the business and where you operate. We have a weekly marketing meeting and we chat. Now it’s Denise, Matt, and I because Matt, even though he’s tied as a Director of Podcaster Success, he comes from a sales marketing background. He’s a lot of product and podcasting domain expertise so he’s definitely involved in a lot of the marketing stuff that we do now. I go to that meeting and we talk a lot of really high-level strategy stuff. The two of them go and execute almost all of it now. It’s great because what it does is just put you on a different trajectory than if you do it all yourself. It really is what we wanted. Denise wakes up and thinks about how to grow Castos every day. I do, too, but I think about a whole bunch of other stuff. I think the more that we can let someone focus on doing a single thing—and we’re only eight people so nobody can do just one thing—the more we can get to that, the more successful they are at their jobs. That moves the needle for us, the business.
Rob: That’s good to hear. Of course, we know you update us with what’s going on. I knew that was the story but it has been so fun for me to listen back to the season and hear you put out the job description. You had a process for hiring. There’s always uncertainty, there’s always like, I think this person’s right, will it work? It’s nice when it works out that well. We hired the right person because there can be that paradigm shift or that one plus one equals three or whatever cliche you want to use. It just levels you up so much more than you probably even expect.
Craig: Even more, the other path there could be let’s hire a content marketer just to write, let’s hire an agency to run Facebook ads, let’s hire a copywriter to do this landing page, but I’ll be the glue to hold it all together or the person to coordinate it, and that just still requires a ton of your mental energy. Whereas you can say, hey, Denise, you own this part, this outcome of the business. I am here to support you and the company’s here to support you, but I need you to be the one that thinks about this all the time. It’s just a very different kind of way to work.
Rob: Absolutely. I’ve been struggling to find a name for all three of these but I talked a lot about how in the early days, I had a lot of task-based people. It was usually VAs who could do a specific task. That’s like hiring a copywriter, go do this, you’re really good at this, but now, I’m managing it. So, task-based people, project-based people, and owners. Originally, I was thinking of founders, but really I should say it as task-mindset, project-mindset, owner-mindset. That fits who can really own this whole area—maybe even delegates and projects—but be thinking about where a task-based person might think ahead of the next week, a project-based person thinks ahead for the next month, and as an owner thinking 6–12 months out or maybe even two years. They don’t have to technically own. It’s not about equity and business, but I think it’s about owning the key results, really planning, presenting, and certainly taking input. As an owner, you don’t just do everything yourself. Finding those types of people is hard but it’s what you need to really level up a business, especially at your size. With eight full-time employees, everyone has to be really good or else it’s a huge drag on the company.
Craig: Somewhere that we’re just getting into with maybe that next step of ownership is that the leaders of each group of our organization are involved in hiring. That is super cool to see. We hired a full-stack developer recently. Jonathan, our lead developer, was the final say on who we hire basically. We’re hiring support personnel, and Matt on our team is going to be the final say on who we hire there as that last interview. That’s super cool to see. In respect, it takes some of the burdens off of me because I basically get a couple of people through the process and say, I’m happy with any of them. you go pick. Also, because they feel super empowered to be making that decision, and they know they have to live with it afterward. That’s a really good thing. That’s not a negative thing. We’re just getting into that. We’re just in the second iteration of that step but it’s really cool to see.
Rob: Something else you did during the season was you had a credit card upfront in order to get a 14-day free trial of Castos. During that, this season, you removed it. That just sends all your metrics all over the place. I remember it was a little bit mixed in the end where you said, yeah, it’s better but not enough that it totally makes sense. That was my memory of it. Is that still how you feel about it? You’re still not asking for credit cards. Obviously, it’s a better way to go, you’re getting more leads. Do you feel like that was a huge win? Was it awash? What are your thoughts looking back?
Craig: I think it has been a good thing. It’s tough to tell over. I haven’t gone back and looked at our month-over-month metrics from a strictly growth perspective to say whether in that kind of shorter-term it was a really good thing, but from a user perspective, especially in something like podcasting—Rob, even though you’ve been doing this forever—it’s hard to get started. You might need more than two weeks to really get your show off the ground. What we found is that people come in, they give it a try, we give them a chance to extend their trial even if they want to right at the end. From a compatibility with the user behavior perspective, not asking for a credit card upfront is definitely the way to go. We have no plans of changing it at this point. For users, it’s the right thing to do.
Rob: Something you talked about in the final episode as we wrapped was I said, what’s next and you said, we’re looking at offering a freemium tier, basically a pricing tier that has a max usage-based freemium. I think it was what I referred to it as. From what I know, that never happened. When did you make that decision, and what was the thought there of not introducing that free tier?
Craig: Most of it came down to engineering resources. I hate to say this. If it was just a flip of a switch in Stripe or something, I probably would have tried it but it would’ve required a bit of work on the back-end to get that implemented. We just had other things we wanted to do, features to build, UI to improve, and things like that so I just didn’t feel like it would move the needle in a significant way. Maybe looking back on it now, that’s because the no credit card trial thing didn’t move a needle a ton so I thought that a usage-limited trial might just give the same type of result. Coincidentally, we may be looking at it again but for different reasons.
Rob: It’s always hard to spend a lot of engineering time or a lot of your time making a change like removing a credit card and have it be. Maybe that was worth it. I definitely understand why you’d be hesitant to go freemium knowing that you could get something else built in that time that you’re pretty confident will move the needle, and Freemium is just such an experiment. It’s such an experiment and it’s not a few weeks of work. Even if the engineering time is only 3–4 weeks, you get to the point where, okay now we’ve done it and now we need to watch it for months because freemium doesn’t convert in 30 or 60 days. You have months and months. If you have other things that are working, it can be a tough sell to justify that. The last thing that you talked about in that episode was you were thinking about whether you should move a little more into enterprise-type offerings, that the average revenue per user of a podcast host is not great. It tends to be a commodity thing. If you look at all the podcast hosts, they’re not priced that high. You were noodling on whether or not you wanted to get into that space, start selling to enterprises, and have some offerings that really made sense to be higher priced. After the episode, you and I recorded that little secret audio that we can cut to right now, and had a little bit of conversation about something you were thinking about to raise your average revenue per customer. During the TinySeed retreat at MicroConf Europe in Dubrovnik, we did a hot-seat format. That’s typically how we do it, right? We go around and each founder gets 30 minutes to think through a pretty challenging difficult issue to get feedback from the batch, as well as myself, Tracy, and Einar. Something came out of your hot seat that could potentially change the trajectory of Castos. Do you want to talk a little bit about that?
Craig: Yeah. It’s funny, my talk at my MicroConf Europe was about SaaS metrics. All along, ever since you and I started talking about this business, the metric around Castos that has been the worst, that’s tough to a fact just like our average revenue per user. We’re just not a hundred dollar a month kind of app. I don’t know that we would ever be for the majority of our customers. We started thinking about what people would pay $100 or $200 for. Pretty quickly, the answer came to be audio editing either as a service or a software tool. The value in a software tool is incremental. We’re talking in a previous episode about incremental steps versus big major steps that would double or triple the size of the business. Building software to help people edit their podcast is cool but not that cool—doing it for them is really cool. I happen to have a lot of experience in this from another business in the space. The idea is can we take that other business called PodcastMotor and roll that service level into the Castos platform, or make it super easily accessible to all the Castos customers? It was a really interesting thought exercise. I think that everybody who’s running a business should say, how can you double your business tomorrow, and just come up with crazy ways to do it. At first, this seemed really crazy. About an hour and a half later, I was like, yeah, that’s totally the way to go because it’s a natural progression for a lot of our customers. They come in and start a podcast. They have some degree of success with it. They want to keep going with it. They say, wow, editing all this audio sucks, and it takes me two or three hours every episode, I would love to pay somebody a little bit of money to do that for me.
Rob: For folks who don’t know what PodcastMotor is or how it works, could you give just a few sentences on how good of a fit it actually is for exactly what you want to do here?
Craig: PodcastMotor is a productized service that I’ve been running for 4½, almost 5 years. All we do is podcast editing, we do show note writing, we have a transcriptionist team. The idea really is a show like this records their episodes, sticks the files in Dropbox, and then we do all the work from there. We do audio editing. We do show note writing. Then, we publish to a website media-hosting platform. We could build a fair amount of automation around that part of it, about the publishing part of it, but certainly, it takes all of the onus of the post-production side of the world off of podcaster’s plate, to let them focus on other more important stuff like marketing and growing their business.
Rob: You have this unique experience that likely no other podcast host has. This is where you started with this productized consulting. One of the things during the hot seat is, as we were talking about it, I said, you could just make it your highest tier. You have a $19 plan, a $39 plan, and then just have a $1000 plan—I had just thrown out that number, made the numbers up—and that one includes full-service production, editing, and such. We were mulling that over and it was like, wow, this has been really interesting. One thing I said was, yeah, but the problem then is if you get a bunch of new customers, you have to scale. Now you have to hire editors and you have to hire transcriptionists. You looked me in the eye and you said that’s not that hard. To me that is hard, but to you, it’s not. You’ve been doing it now for years, and you have an amazing process to accomplish that.
Craig: The place this really makes sense is in the scalability of it. Because we have been running this business for a while, we know how to hire and vet people, bring them into our process, onboard customers, and things like that. At the scale, we would hopefully be talking about within Castos or expose to the whole Castos user base, new trial customers, and things like that. They would need to be a little better because we have 50 customers on the PodcastMotor side of things now. We could probably have 500 as part of this combined business. It’s nothing if one of our competitors decided today that they wanted to start a PodcastMotor-type of business tomorrow. They would have the years of headaches that I’ve had so far before they could get to where we are.
Rob: It’s a fascinating competitive advantage. I’m surprised that none of us thought about this sooner. I’m including myself in there, you, Einar, and just anyone in the batch that we never thought about enough to think about combining these. Why do you think that is?
Craig: A little backstory, I guess. The first version of our hosting platform was still under the Seriously Simple Podcasting brand. It was on the seriouslysimplepodcasting.com site and all this kind of stuff. We went through a rebranding exercise to become Castos. Part of that rebranding consideration was, why don’t we just call it PodcastMotor? For a lot of reasons—this is one of the decisions we have to make now—it gets difficult to discern between the editing service and the hosting platform if they’re all under the same roof. We’re going to move forward with this integration to bring the two companies together, but they might still have separate websites. They might just be an integration partner that ultimately all the money still goes in the same bank account. That’s the reason we didn’t put the hosting platform under the podcastmotor.com brand before. We had some concerns about what do people who know PodcastMotor as an editing service come in and see this hosting stuff, what are they going to think? I had definitely thought about combining the brands before, and then made a decision to treat them as separate entities. One because of branding, messaging, and things like that. The other is, like Thomas Smail says, one day you’re going to sell your business, or you’re going to end your business. I wanted to have some optionality and keep them separate so that I could do different things with each of the businesses. I didn’t then think that the combined entity together of both facets of the business was as strong together as it is. That’s probably the thing that I got most out of our discussion, with talking with you, Tracy, Einar, and everyone else. The valuation of this combined company is still really, really strong, whereas the valuation of just a service business maybe isn’t as strong. And the value proposition of, hey, you can come in and we can provide now, the two big huge things that a lot of podcasters need. We’re going to check three of the four or five big boxes in podcasting all in one house.
Rob: You were basically talking about merging PodcastMotor into Castos. Or at least, you were talking about offering editing through Castos because there’s a higher price point, higher average revenue per customer. You talked a lot about not merging the brands potentially, and not merging the websites. It seemed like you were uneasy about that. Talk to me about what’s happened over the last year with PodcastMotor and Castos.
Craig: In the spring of 2020, maybe in the fall of last year, we introduced Castos Productions which was, at that time, a white label version of the PodcastMotor service from within the Castos dashboard. You upload your raw recording files or you send us your Squadcast links like we would do for this episode, then the PodcastMotor team on the backend does the editing, show notes, writing, and production work. That went over well. We had a good reception from clients and from our advisors. People just kick in the tires and say, yup, it makes all the sense in the world to put that all in the same place. I’m happy to do that. So July of this year, we formally merged the companies and started the process of migrating those existing PodcastMotor customers over to using the Castos Productions workflow, to manage all of their podcast stuff in the Castos app, both the production work, hosting, distribution, and analytics all in one place. Then, we took the really big leap which was to merge the brands—naming and the websites—just maybe six weeks ago. If you go to podcastmotor.com today, you’ll go to the Castos productions page on castos.com. Overall, it’s been really successful. Rob, you and I talked offline about the decision to do this. For a lot of reasons, managing just one brand generally is a lot easier from an SEO perspective. It definitely is better to have all of your links juice pointing to one place. There will be people that say, yeah but if you were two brands you could have multiple listings on the first page of Google for a term. That’s the case, but generally, we think we can rank for more terms as a single site, so that’s what we’ve done. Generally, the only thing that we knew we would have to do and I think we’ve done a good job is to manage that legacy PodcastMotor name for people that know us or were customers of ours before and want to come back to do another season or something. On that page, on that Castos Productions page, we reference PodcastMotor. We have a banner at the top of the page announcing that PodcastMotor is now Castos Productions and links to an internal blog post that we have about it. I think that’s the thing that I was the most scared of is what is like a really nice brand? The PodcastMotor brand and the job we do there was really great, so how to transfer as much of that over to Castos Productions as possible? The thing that you and I talked a lot about was the thing that gave me pause before and that we’re keeping a very close eye on now that that move is taking place.
Rob: This is one of those decisions that I think is the right decision the way you did it. Correct me if I’m wrong, but I believe I gently nudged you in that direction of my gut based on things I’ve seen, and where you are is that you should fully merge. There’s more power in it, there are more SEO powers, and there’s more brand power and all that. I’m not like it’s 100%. You absolutely have to do this. It’s the only way to do it. I do think there are nuances as you said, but I feel like it is the right decision and has been the right decision from my outsider’s perspective. You’re six weeks post doing it, so obviously you only have so much perspective at this point. Do you feel so far that it was the right choice? Do you have any regrets about merging those two brands?
Craig: It’s definitely been the right choice. I don’t have any regrets. I think the reason is if you look at the potential plus and minus of it, the plus is that everything is in one place. It’s one brand. Messaging should all be really clear around this. The downside is that last part maybe, with two separate brands, you can be more clear and opinionated about what that messaging is. When they’re all in one place, it can get a little more muddled and a little more difficult to be really explicit about what a brand is. Now, Castos is podcast hosting and production, whereas before it was just one thing. I think the positive of having it all in one place. Having these professional services in front of all of our customers is just way above that potential difficulty and messaging.
Rob: Right and it’s such a differentiator because no one else is doing this. Where else can you go to get hosting, to get editing and production, all the transcripts, the YouTube stuff, and just all the things you do? It is a unique space in the market. I’m excited to see where that takes you moving forward. How hard did it wind up being? It’s funny we talked about a year ago and you said you got done with it six weeks ago, surely you weren’t working on it for ten-and-a-half months. It must’ve been starts and stops.
Craig: It was a lot of starts and stops. I probably just forgot about it or it wasn’t a huge priority for a while. I think we really saw some good traction with Castos Productions when it was just a white label version of PodcastMotor. We really thought, time to get more serious about it because at that point we really had three brands. That was too much. I decided to bring it all together. It’s a fair gamble because we talked about reversible decisions. I don’t think that’s a reversible decision. We’re down this path. That’s a 301 redirect like that stuff to take back. We tested the waters with it too. I felt like we had some data well before we did all the stuff in July.
Rob: That’s the thing. I have a question here. Has it moved the needle yet? I’m not totally sure what I mean by that, but I guess I’m thinking you bring over this brand and this new service, and you would hope that new customers or existing customers would adopt it in a way that maybe they wouldn’t have if you kept those two apps separate.
Craig: It’s definitely moved the needle. First, all of our revenue code goes into one place, that’s great. That’s just easier to keep track of and everything. The thing that it does is that it simplifies our messaging a lot because instead of me being on sales calls for Castos Productions and for PodcastMotor, I’m on one side of sales calls. We have one set of pricing, we have one set of offerings, and in that respect, it’s definitely improved our positioning. But it’s still an ongoing thing. It’s still something that we are continuing to refine the experience, the actual user experience, positioning, the pricing, and all of this, which is cool. It’s another lever we can turn and that’s fun to have.
Rob: Yeah. What I love about it is this concept of a dual funnel that I keep bringing up of having this wide, lower-cost funnel. We have a lot of people coming in. Maybe it’s freemium, maybe it’s a credit card or whatever but when you’re getting hundreds of trial sign-ups or even into the low four figures of trial sign-ups in a month, that’s a very wide low touch, low-cost funnel usually with low average revenue per customer. You can build a good business on that. You want to raise average revenue over time. That’s a low touch funnel. Then, there are high touch funnels where you’re selling for $500 or $1000 or $5000 a month and more enterprise stuff, long sales cycles. You can build a business out of there. The dual funnel, when you have a SaaS that has both of those, that’s amazing. Those are the apps that I’m seeing grow the fastest right now. I think back to even in the Drip days of our starting price of $49 and eventually, we had a $1 plan and then a free plan. We had people coming in and saying I’m going to pay $1000 a month or $1500 or $2000 a month. That’s a nice dual funnel. You do have this amazing brand, you have the reach, and your word of mouth because you can have thousands or tens of thousands of paying customers on the low end. Even if you only have 50 or 100 or 200 larger customers, it can become the point where the vast majority of revenue actually comes from those because they pay you such an overwhelming amount of money. A lot more apps out there are like this than people realize. A lot of the apps we use that are inexpensive actually make a ton of money. Slack’s another good example or Zoom where they have this free plan. They have a wide funnel. Everybody knows who they are and if you’re a small company, you pay Slack $6 or $8 a month per employee. My team is a team of five. I’m paying them $30. That’s not a great average revenue per customer for a company that wants a multibillion evaluation. But IBM, Microsoft, or whoever—I guess Microsoft has their own product—insert Fortune 500 company here who doesn’t have a competing product, are likely paying Slack $10,000, $20,000, $30,000 a month. That is the dual funnel that allows them to grow incredibly fast. That’s what you’ve introduced here. You essentially still have this great product with this great low-end price point. Great for consumers, not for your average revenue per customer but great for your customers, and you do have a mini brand with thousands of people that use it. Now, you also have this high-end enterprise offering and that brings that average revenue per customer up pretty substantially.
Craig: Yeah. We’re now getting into the third leg of that stool which is really cool. It has its own messaging challenges but we are having conventional podcasting, podcast editing as a service, and then private podcasting that is in some ways a whole other animal, a whole other product and whole other type of customer but is very interesting both from a revenue perspective and from a business and product and where we are on the market perspective. It’s cool and challenging at the same time.
Rob: I’m really interested to dig into this because when you talked about building private podcasting, the first thing I asked was is anybody else doing this? Why would you do it? I’m not sure I understand it but you guys are essentially on the leading edge of this. You’re stepping out. This is a novel, new entry into the market. That’s the thing. I was thinking, I’m sure it’s aimed at (I can imagine) any Fortune 5000 company might want a private podcast for their sales staff or for their employees in this day and age of working remote, but I could also see Startups For the Rest of Us having a private podcast that people pay a Patreon or a subscription for. I can see MicroConf having a private podcast for people who go to this event or for the Connect Slack Channel with only them. Or how about a TinySeed private podcast only for investors or only for mentors? Am I making this up or is that where it’s headed?
Craig: It’s literally anything you can imagine. We have mental health professionals having private podcasts for each of their patients. We have Fortune 100 companies that we’re working with having internal private podcasts for their sales team or for their HR groups. We also have enormous health and fitness brands having private podcasts as an extension of their membership site or their course. That’s tens of thousands of people coming in. They have a course or they have a membership site. They have content there and they want to add podcasting as another way to connect with their tribe or their members. We are really uniquely positioned. One, from our WordPress integration, that a lot of people do this membership type stuff in WordPress, so we’re a natural fit there. We also have some native integration with membership platforms like MemberSpace to where new members start paying you for access to membership sites. That person automatically gets added to a private podcast in Castos. All totally automatic that you as membership site administrator don’t have to do anything and you’re able to offer this to your members, which is a huge value. I think it’s just such a natural fit. Now that we’re here I think of course, why didn’t we do this a few years ago? Rob, it might be like what you saw with Drip where you weren’t ready, the market maybe wasn’t ready. Now—knock on wood—I feel like we’re at the right place at the right time with this because it’s a huge opportunity and people come to us and they are absolutely thrilled that we do this the way we do. That makes me feel really good.
Rob: It’s easy to think like a product person. The next feature I launch is going to be the one that changes it. Most times it’s not, most times you try to market it and it’s ho-hum. But this one seems to have really resonated in a way that I’m not sure I anticipated when you were talking about it. I’d hope that it would bring in the Fortune 1000 or 5000. You can charge a lot more for this because it is a premium feature, but the conversation you’re having with people on the interest of this, it sounds like has been really strong. Did you expect that or were you a little bit questioning or tentative about it? I know you were all in on building the future but did you expect it to have this level of interest?
Craig: I would be lying if I said of course I knew that this was going to happen. Of course, I was very hopeful, but I think you don’t know when you’re expanding the edge of what people expect from an ecosystem and a platform, and the behavior that they have with something like podcasting or email marketing. It is when you say you can charge money for a podcast directly or you can only offer this podcast to certain people. Even today, folks are saying that’s not a thing and you explain it to them. They go, of course, that totally makes sense. I can imagine doing this for X. When we started to have some of those initial discussions, then we had more confidence in it. We did a fair bit of collecting email addresses and chatting with folks. We had some people on the platform from day one that was duct-taping this together with Zapier and the membership platform and stuff like that but didn’t have that last piece of individualized private RSS feeds from the hosting provider. That’s what we are providing.
Rob: Right, so you can revoke access in essence when it happens. Congrats on getting that life and certainly stoked to hear about the interest. Obviously, as an investor through TinySeed, it’s nice to see when things go right and I get to live vicariously through your victories, which is fun to be along for the ride. I do want to congratulate you as we move to wrapping up. I want to congratulate you on hiring Matt Medeiros as your Director of Podcaster Success. If folks have not listened to the Audience Podcast and if you are interested in starting your own podcast, or growing your audience, or learning how to monetize, or all the tech stuff around podcasting, search for Audience in your podcatcher. I listen to every episode that comes out. It’s a really high-quality show. I can tell that Matt has pulled a burden off of you because I know that you were putting that out every week and I know it was a ton of work for you.
Craig: Yeah. It’s funny. Just before recording this, Matt and I recorded an episode and talked a lot about this, him coming on board, he is a better podcaster than I am and has been doing it for longer and it’s been awesome to bring in a total A player to own that part of the business. As an entity of the podcast, it’s much better off primarily in his hands. It’s been cool.
Rob: That’s a double win when they can do it perhaps a little bit better than you can and that you get the time back. You don’t have the mental burden of, what am I doing because producing content like this is fun, but it does take that good glucose. It takes that creative energy that you can’t put into writing copy or doing other harder things. As we wrap up, I want to hear what you’re excited about right now. What’s new with Castos? Whatever this week or this month? What’s kind of the big thing that gets you excited?
Craig: We have like two real initiatives that were driving hard on. One is doing everything we can to be the obvious choice for people who want to create a podcast and use WordPress as their website. Specifically what that means is we’re launching an integration with Elementor by the time this goes live. This will be out so you can manage all of your podcasts, design, contents, player, everything from the Elementor editor. Elementor is the most popular page builder for WordPress, so we’ll fit directly into the Elementor editor and all of your podcast stuff happens right from Elementor. That is super cool and hopefully opens up a chance to do some co-marketing and brand exposure between organizations. We’re doing more things in that kind of vein of the businesses, just doing cool things and offering good free tools for people on WordPress to make that experience even better. The other one is private podcasting. It takes a lot of different forms. I talked about courses and membership sites but also for internal company podcasts and working with real enterprises and what that looks like. The question mark still—we might have talked about this last year—is Castos directly being able to be the payment processor via Stripe, a way for you to charge money for your podcast directly. That’s still a bit of a question mark. I think it’s a question mark from a strategic perspective because I think about podcasting as a hobbyist and an aspirational thing, I can imagine a lot of people coming into a tool like this, like Substack. I imagine Substack has an enormous number of people that don’t make any money from their newsletter. If you think that what we’re talking about building with premium podcasting is the same kind of thing, you’re going to have a bunch of people coming in, making content, charging money for it, and not making any money. That’s just how it goes. It’s tough to build a community and a following online. It’s even harder to get those people to pay you money having the micropreneur academy, FounderCafe. We’ve taken the approach so far of let’s help people that already have a significant following, and integrating with their course platform, their membership site, or their community, and offering podcasting as something that they add-on at an additional way to that. From a project strategy perspective, I don’t know if going directly to people that want to charge money is the way to go. I’m sure we’ll do it but I think we’ve made the right decision so far to say let’s use the audience we already have and the membership tools that they’re already using to manage those members and payments and things like that and us be the podcasting tool that adds on to those, as opposed to having to—from a product perspective—create the whole stack and maybe have people come in that, think they can build a community, and charge people money for it because I think it’s just really, really hard. We’ll see.
Rob: The aspirational people will come but I think you can get around that with pricing. I’m just going to throw up pricing. If it’s $99 a month plus whatever for downloads or something then you’re not going to get as many aspirational because they’re going to say that’s too expensive. If I had MicroConf as an example or Startups for the Rest of Us, $99 a month is a no brainer for us. Certainly for whoever, Target, General Mills, and Best Buy, these are just Fortune 500 companies that are here in Minneapolis that I was thinking of. For them, it should be even higher. I guess Best Buy, Target, and General Mills are not going to charge their people. That would only be for someone more like Startups for the Rest of Us or MicroConf if we did decide to make that a paid thing. Again, if you just keep that minimum price at a certain point, because you’re not a commodity right now. You’re such a unique offering that if people want it, they need to come to Castos. Once the feature is going to get cloned, you get copy cats, they probably won’t build it as well as you guys have. Eventually, it will get to that point and you have to make that decision of, do we want that lower-end of the market, the aspirational people, but I guess you can make that decision when you get there. Is it something you feel like you could solve with pricing by just having that higher minimum per month?
Craig: I think so, but I think that all that does is it doesn’t attract the aspirational folks that don’t already have that audience or don’t think they could get that audience. The thing that I’m most concerned about is this resource allocation of it’s a month’s worth of work for a developer at least to build all this stuff, could we go do something better with that?
Rob: I want to see it that you have ample leads coming in on that higher-end that want to charge for it. If you’ve only had a handful come in then I don’t know. If you haven’t lost a deal because you don’t have it built-in and it’s a month of work, that’s tough. Given how fast you have to move and how much you’re building, it’s a tough decision to make.
Craig: That’s definitely a question mark. It would be super interesting but I’m not sure.
Rob: Well, awesome man. Thanks again for taking an hour and hanging out with me here again on Startups for the Rest of Us. On Twitter, you are @TheCraigHewitt and obviously castos.com if folks want to see what you’re up to. Thanks so much for joining me again this week. I hope you enjoyed that conversation with Craig. I’ll definitely have him back again in the future. He always has interesting insights, is moving so fast, and doing so many interesting things that it’s pretty easy to bring out essentially good conversation and good content for here on the show.
TinySeed Tales S2E9 | Playing the Long Game
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Brian & Scottie Elliott are the husband & wife co-founders of Gather, an interior design project management app.
Join Rob as he chats with Brian & Scottie for the final episode of Season 2 of TinySeed Tales. In the last year, Gather managed to double their revenue and overcome most of the challenges they faced along the way.
It’s been about a month since we last spoke and during that time, their recent cash crunch has started to resolve itself.
In this episode, we reflect on the past year and their success (and struggle) with moving upmarket.
The topics we cover
[01:01] Gather’s recent cash crunch
- Cashflow is not our biggest concern anymore, which is a great relief.
- Since that time growth has been either sorta normal steady when you average it out or maybe a little slower the last month and a half.
- Small Business Association loan and PPP loan changed things for us,.
- One was the loans, the other was that Gather landed a bigger enterprise client who was willing to fund features and who was willing to put cash upfront for you to build them.
- That allowed us to ramp our developer up from the part-time back to full-time, which was great.
[06:46] Looking forward a year from now
- I think we’re just going to have a much more well-rounded product.
- I could easily see us doubling again, this coming year.
- I feel like we’ve just been learning a lot about where we’re lacking, what could be better, and what would be. More valuable or what to add.
[07:55] Did going upmarket save the business?
- No doubt. Previous, smaller clients are very cost-sensitive.
- With our larger firms, pricing doesn’t seem to ever really come up. It’s mostly about features.
- We’re not adding a ton of customers per month, but each one that we add they’re worth more and we’re just not turning out the smaller folks.
- It was such a big gamble right at the start.
- When you go upmarket, you can charge more and churn is going to tend to be lower Sales cycles will be longer, but people stick around longer. There’s more loyalty.
- We’re excited about where those next five years are going to go because we think we’re sort of just, even at the beginning of this journey, even though we’re a bit into it already.
[14:56] Advice for early-stage SaaS founders
- Relax into it. It doesn’t mean that you can be complacent and that you can’t pay attention, but just realize like you’re on this path, you’re on this journey and it’s going to take however long it’s going to take. It may not be the product that you’re working on right now. Maybe the next one, it may be five products down the line, but whatever it is, it’s just a matter of staying with it and being okay with the waves and roadblocks that come up around you and just go around them as gracefully as you can. Keep at it because the process is, for me, anyway, as much as the outcome.
Links from the show
- Gather | Website
- Brian Elliott | Twitter
Thanks for listening to another episode of TinySeed Tales. If you haven’t already, be sure to check out Season 1 of TinySeed Tales where we follow the Saas journey with Craig Hewitt of Castos.
Episode 521 | A Roundtable Discussion about a Potential Recession, Working from Home, Google Anti-trust, and More
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Episode 521 is a roundtable episode where Rob brings on a couple of guests to talk through topics today that relate to bootstrapped and mostly bootstrapped startup founders.
Today, we have Tracy Osborn and Einar Vollset joining us, as we talk through a potential impending recession, the Google anti-trust suit, Dropbox moving to permanent work from home, as well as a handful of other topics.
The topics we cover
[04:03] What do the revenue trends look like in 6-7 months from now?
[13:36] Google anti-trust suit
[19:23] Dropbox remote offices
[27:29] SPACs and why it’s so hard to go public in the US
[39:35] A warning about Glassdoor
Links from the show
- The 99 Investor Problem
- U.S. Accuses Google of Illegally Protecting Monopoly
- Dropbox will let all employees work from home permanently as it turns its offices into WeWork-like ‘collaborative spaces’
- The TinySeed Investment Thesis
- A Warning About Glassdoor
- Tracy Osborn | Twitter
- Einar Vollset | Twitter
If you enjoyed this episode, let us know by clicking the link and sharing what you learned.
Click here to share your number one takeaway from the episode.
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
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Rob: Welcome to this week’s episode of Startups for the Rest of Us. I’m your host, Rob Walling. Each week on this show, we cover topics related to building and growing startups using an ambitious yet sustainable approach. We’re not willing to sacrifice our health or our relationships to grow our company. We view relentless execution and a long-term mindset as things that we value. This is episode 521. Speaking of long-term mindset, we’ve been doing this show for over 10 years. Today, we are tackling some news stories. This is a startup roundtable episode where I bring on a couple of guests and we talk through topics today that relate to bootstrap and mostly bootstrapped startup founders. Today, I have Tracy Osborn joining me. Tracy’s been on the show many times. She is the program manager at TinySeed so we work together on a day-to-day basis. She is the founder of a startup called WeddingLovely that she worked on pre-TinySeed and shut it down shortly before joining us. My other guest is Einar Vollset. He is my co-founder in TinySeed. It really is a trio of TinySeed folks here today. Einar co-founded TinySeed with me. He does a lot of the investor relations work and works in the accelerator as well. He also founded Discretion Capital, where he helps SaaS founders who are doing $1 million or more in ARR sell for revenue multiples. He’s been on the sell side of SaaS for quite some time. It’s a good panel discussion today. We cover topics ranging from a recession impending. We talk about the Google antitrust and how that may or may not impact our types of companies. We talk about work from home, DropBox going to permanent work from home, and a handful of other topics. Before I dive into that, I got some good feedback—both constructive and some positive feedback—on TinySeed Tales. The final episode of season two goes live here in just a couple of days. I heard from JJ who said, “Love this episode’s great stories and excellent content about the challenge of being a startup founder.” From Dan, he said, “I love listening to this format of the podcast. I find them really interesting and entertaining, as well as hearing some of the smaller scale problems that bootstrappers face. They remind me a little bit of the first Gimlet Series which I truly enjoyed and wish was still around.” From Kyle, I got some feedback saying, “I like the general idea. I did stop listening to season two after a few episodes. I’m a little fuzzy as to why I stopped, but I want to say it didn’t seem as if I was going to learn that much from the company or from the episodes. I’m thinking what would’ve been more intriguing is if you were in more of a cultural and I get to hear you coach them more. Again, if I recall correctly on season one, Craig was further along and he was experienced so you coaching him seemed less critical, but in this one, I felt like I wanted to hear more of your voice on their journey.” We really appreciate everyone who wrote in to me. This was just a sampling. Again, I’ve received both positive and constructive feedback on it. That is what I’m looking for to figure out, (a) should we continue to produce the TinySeed Tales episodes? and (b) what changes we should make to the show format as we move forward? With that, let’s dive into our conversation. Tracy, thanks for joining me on the show today.
Tracy: Yeah, happy to be here.
Rob: Einar, you as well.
Einar: It’s very good to be here.
Rob: It’s good to have the band, I was going to say back together, but this is the first time the three of us were appearing on the podcast. I think it’s cool. You both have made multiple appearances over the past 12–15 months, but I haven’t done too many of these. I get a lot of requests to do the three- and four-person news roundtables, but they tend to be pretty hard to plan. The logistics are tough, and then it’s oftentimes hard to find enough topics that really relate to our crowd. We can talk about stuff that is broader news. Jason Calacanis says this with great success on This Week in Startups, but he’s relating it to the world. He’s talking about trade policy and this and that, and I find that it can sometimes be hard to link that back to boots on the ground, MicroConf, Startups for the Rest of Us, TinySeed-type startups. But I do think we have a good docket today. The first topic we’re going to cover is a listener question about the economy. It’s from an anonymous listener. He said, “Early on in the pandemic, you described a broad revenue trend along the lines of, about 20% of companies that you’re invested in or had the financials off their way down, 60% had a minimal difference and 20% are way up.” This question asker says, “Hey, we actually landed in that 60%.” I said that off the cuff one day and then I came back to it a week later. I looked at the numbers and it wound up being closer to 15%, 70%, and 15% for what it’s worth. Give or take, it doesn’t really matter. He says, “So, here is the question. It’s 6–7 months later, what does that picture look like now? I suspected a lot of us in that initial 60% group are starting to feel signs of a real recession. Maybe a few extra customers churn, maybe customers feel renewed but get lower users. The effects aren’t huge, but they’re there. My sample says it’s small but I’m seeing it. It’s not falling revenue but it’s flat where I had expected growth. There’s a lot of reasons why people don’t want to admit this stuff. Revenue failing to hit forecasts is not a good look. Disappointing looks are hard to face. No one wants to consider the implications of that for themselves or for others. If other startups out there are seeing signs of this, it might be helpful for the community to know what to look for and what to do about it. My business is fine and we have a broad customer base, but I’m curious to see what you’re seeing out there in the space.” Einar, you want to take this first?
Einar: Sure. My view is things haven’t changed all that much. I still think the breakdown is roughly what you said. Particularly SaaS businesses that are serving industries—whether that’s travel, schools, or restaurants and things—I still think they’re hurting. I don’t think it’s quite in the same deep freeze as it was back in March–April time frame but certainly, a lot of those companies are still hurting. I don’t think it has expanded necessarily. I do think on the other 15% side, the growth spurts that came for the winning companies have slowed down a little. We saw some companies, in particular—before COVID were growing 30%, 40%, 50% a year—who all of a sudden grew 100% in 3–4 months because they were at the forefront of whatever, work from home, or something that’s COVID-related. We’re starting to see more normalization for these guys’ growth rate. Some of them are back to where they were, 30%–40%. Some of them are coming down off the peaks and perhaps stabilizing at a higher base. Certainly, that’s true (for example) with things related to ecommerce, delivery things, and stuff like that. In the middle, I don’t know, actually. I’m not 100% sure. I feed bad for the question asker. I want to say, yeah, that’s what I’m seeing all over, but that’s really not fully what I’m seeing or at least hearing. People are still tentative. Budgets are harder to get on and approvals are a little harder, but I’m not sure that it’s going to slow down into the fall, from the people I talked to, anyway. It’s peculiar to this small sample size.
Rob: Tracy, you have insight into at least 23 companies across TinySeed batch 1 and 2. What are your thoughts?
Tracy: One thing I was wondering about this question in terms of timing—and I was going to post a question to you, too—was the possibility of things sliding to a recession, but also worrying about that happening while we’re also going into the holidays. What is the drop in growth? Is that something that happens with startups? It’s something that happened with me in my previous startup because we were so…
Rob: Seasonal?
Tracy: Exactly, we were a seasonal startup. I was wondering if people were like, oh, should I be worried about a recession if it’d be worthwhile to go over what you just see go into the holidays—keeping in mind that holidays are in COVID so things are going to be weird—versus if it’s a recession, how that’s affecting your business.
Rob: My thoughts there are obviously if you’re an ecommerce, Black Friday’s coming up. Any type of ecommerce SaaS, software, or whatever is going to be going up into the right over the next month, and then it’ll drop down in Q1. I saw seasonality in all of the companies that I’ve run. It wasn’t seasonality; it’s too strong. I would see (usually) dips in growth, especially if it was SaaS. It wasn’t the revenue drop, but it was the growth that would slightly decelerate. We get fewer signups right around tax day in the US—mid-April—and then around December. I was counting it lucky if December grew at all. If we stayed flat, that was fine, but I really wanted to have a good November. Then, we would come out swinging pretty hard in January. We often launch big things in January.
Tracy: That’s exactly what I was getting at. I’m curious to see how things would happen in January, also depending on US politics, where we are in COVID. This going […] and getting at is, is it too early to say about the recession, being that there are other things going on?
Rob: The uncertainty of COVID, the uncertainty of US elections and holidays coming up, I can see them making people uneasy and not wanting to purchase. The question asker, his business is flattening or not growing as fast. It could be justified by that. I’m invested in between TinySeed and my independent staff. I have 35 investments, and I’m not hearing that there’s slowing down. I’m not seeing plateaus or slowing across the board. There are two questions here. One of them, I may be answering with no, I don’t think everything is flattening right now yet. The second question he’s asking implicitly is, do you think there is a recession on the horizon when we look out 3–6 months? For me, it’s a big I don’t know. I was talking in 2015–2016, there has to be a recession coming. There was in 1989. Well, no. There was one in 1993, there was one in 2000, there was one in 2008. I kept thinking it’s not that it’s every seven or eight right years, but this has been going on, the stock market’s really overpriced. When I sold Drip and had all this cash, I remember just agonizingly investing in the market. I was like, I’m waiting for this thing to be cut in half any day. That really didn’t happen until COVID. It happened in January of 2016. There was a big correction but it came back the next month, so there’s no recession there. The next big hit obviously was when COVID started, but it was so short-lived that I don’t know what’s coming.
Einar: Well, it was short-lived. There’s sort of a binary outcome to start. I don’t know if we’ll be turning to a stock discussion program here, but if you look at the companies that are listed on the stock industries, you see that basically the reason it’s recovered is because of the big tech firms like Amazon, Facebook, Twitter, Zoom, those kinds of things. They’ve done really, really well, versus the Russell 2000 which was the small-cap companies that are listed. They really haven’t recovered. They’re still down 20%–30%. It’s been a story of two different trade industries, which also partly backs up my view of the market. This relates to M&A, too, in the software space. It’s been very strong. If you’re in software or anything semi-positive, like you had tailwinds for at least the last few months now. Today, I think the Dow is down 3%. There’s obviously a lot of uncertainty around the elections. Who knows what’s going to happen with the vaccine and things, but certainly, the last 3–4 months, if anything, I’ve seen tech firms have tailwinds through the last few months at least.
Rob: I think you’re combining two things because you’re talking bear market, bull market, and stock prices, and I’m thinking more recession or not. I’m thinking of SaaS companies just getting started to several […] and revenue, mostly bootstrapped, are they still growing? Even about the retail store here in town, they don’t necessarily care about the stock market. It obviously impacts the broader economy, but when I think about it, if I was running a SaaS company today—whether I was doing $100,000 a year or $5 million a year, and I was, again, bootstrapped or mostly bootstrapped—I would be slightly cautious right now because of how much uncertainty there is. None of us can predict a recession, but there are a lot of things that can go wrong in the next six months. Personally, I’m fairly risk-averse especially when I’m running a company that I don’t want to lay people off. I don’t want things to go to zero. I don’t want to miss payroll or whatever it is. I would be thinking about being a little bit conservative or having a little more of a cash cushion than I would have in the boom times. I mean, you go back a year, you don’t need so much of a cash cushion if you’re going 10%–20% a month. Right now, I would be thinking about, what are my plans B, C, and D if things start to go sideways here? What if growth flatlines for six months, are we good? I’ll be asking myself some what-ifs and figuring out which of these could be company impacting
Einar: Yeah, I think it’s fair. And buy some Bitcoin, obviously.
Rob: Oh my gosh. Tracy, you’re on crypto?
Tracy: My husband is very into crypto, but I am not. I’m sorry, I’m going offhanded here. It’s fun being adjacent to that world but then listening to Einar and his thoughts.
Rob: Einar is just in it for the big score. I definitely know crypto that people who listen to podcasts know that I dollar-cost averaged in. I blend it on these big runs because right now it’s up. I do a little with a dollar-cost averaging out, so I feel good about that. Our next topic is a story from the New York Times, and it is about the Google antitrust suit. The US accuses Google of illegally protecting a monopoly, the Don’t Be Evil moniker that Google had for many years. A lot of us especially small startups who have experienced whether it’s direct competition, whether it’s being stepped on accidentally, whether it’s having AdWords constantly being more expensive, whether it’s having our keywords be not provided, whether it’s having them not send us traffic because they’re doing snippets at the top of the homepage, I definitely think there is a sentiment in early-stage startups that certainly, Google’s doing something that may not be fair or encouraging of the ecosystem. Tracy, what are your thoughts on this antitrust suit and how do you think it impacts the startups in our community?
Tracy: Google just feels like it owns everything. It has its fingers on everything intact, and you can’t avoid them. People are still talking about Superhuman—this other email thing—while everyone’s like, oh, but Gmail’s the best. You’re like, okay, I won’t talk about advertising, Facebook advertising, Reddit advertising when really, Adwords is a thing you have to start out from. You get a new phone, and Google is on your phone. That’s what you said earlier, that’s a lot of these antitrust cases about the phones and everything coming with that bi-standard. I’m a fan of any kind of breaking up at least a little bit because I feel like Google being in all these areas and having its fingers in everything is slowing or preventing some amount of startup innovation in those spaces. What will we see if Google wasn’t number one in everything that we do? In some way of breaking it up and allowing for more innovation from people, where would tech be if Google wasn’t the behemoth that it is right now?
Einar: Ditto. I broadly agree with that. The specific case that the DOJ brought against Google is pretty narrow. If you read it, they’re saying like, okay, it’s antitrust to protect their search monopoly by paying billions of dollars to Apple and whatever to make Google their default search platform. Broadly, I agree. It feels a little bit similar. It’s like Google is walking towards the situation that Microsoft was in years ago back in the 90s. Microsoft was the big bad wolf that squash you, outcompete, buy you, or do whatever. It’s funny that basically, Microsoft got sued by the DOJ for antitrust when they were 22 years old, and Google is actually 22 years old this year. It’s almost like a college graduation thing, like, congratulations, you made it, here is a lawsuit from DOJ. You look at what happened with Microsoft when they did face that sort of thing. That’s overall been good for the startup ecosystem, that stranglehold that they had on tech. There are two ways to look at it. Either the fact that they go sued and things open up some innovation, but then the flipside of that, too, is people have to work around that monopoly to a large degree. That’s why you get WebApps and things when you did in the early 2000s. I don’t know. It’s one of those really big market-moving things, a direct impact on bootstrap software entrepreneurs. It’s more TBD, to be honest with you.
Rob: The big thing that I’ve seen Google do over the past 15 years as I’ve been more involved in the ecosystem, as I’ve started running Adwords, that has been anti-innovation or anti-startup directly, is this slow titration or this decrease in the amount of data that they give to people who are trying to market their businesses. When I started pulling keywords out of Google Analytics, they give Not Provided instead of the actual keyword people were using to search their site. Before Not Provided, I was a small business that was marketing on the internet. I was either doing SEO or was buying AdWords, but it would tell me, hey, they clicked through this keyword and they converted. This keyword converts really well for you. They pulled it out and they gave some […] excuse about it being privacy. First, it was only SSL and then they just rolled it out to everything. What it did is it forced you to buy ads from them. If you buy their ads, they give you the keyword. So how is it so? It never made sense. There was a bunch of uproaring, and Google said we don’t care. Then, they slowly pulled all the data out. Their keyword tool is completely useless now. They said they would never sell search rankings, but if you just search for any term, the top three, four, five positions now are all ads. The organic number one is oftentimes below the fold depending on how many things you have on your screen. You can’t even identify the damn ads. It’s a tiny little box. I had to teach my kids that those were the ads. My mom still—I’ve watched her using the computer—clicks on the top result every time. I’m actually like, oh, you just cost that store money. She’s like, why? I was like, well, you clicked on their ads. She’s like, how is it an ad, it’s a top search. People don’t understand. That’s not what this suit is about. This suit, to be clear, is about the default search engines on these mobile devices. It’s all intertwined. It’s a lot like Tracy said. They are everywhere. Do I believe that they have used monopoly-like powers to just throw their weight around and not care what the market says? I do.
Einar: Oh, yeah. Just ask Mike Taber. The hoops he had to jump through to be able to get to what effectively is the default email client in the world. That’s something that Google can do. All the big boys do it. Twitter is famous for yanking their developer API after the developer helps them become famous and become popular in the first place. I agree with that.
Rob: Our next story is about Dropbox. I’m reading this on businessinsider.com. By the way, we will post all of these stories in the show notes. The headline of this story is, Dropbox will let all employees work from home permanently as it turns its offices into WeWork-like collaborative spaces. Shouldn’t they just say coworking-like collaborative spaces? Why does it have to be WeWork-like? That’s interesting. It’s like saying, Kleenex instead of tissue, or Band-Aid instead of a bandage. Anyway, in essence, Tracy is this just the rest of the startup world? The Silicon Valley startup world is finally catching up to what bootstrappers have been doing for the past 10 years because we didn’t have the money for offices?
Tracy: No kidding. There’s a lot of negative effects from COVID and the effect around office spaces. There are just these norms that once you got to a certain size, you had this office space. What was it? Yahoo! used to let you work from home, then Marissa Mayer became the CEO and she rescinded that because that was the norm. Yahoo! is innovative before but they’re using that as an excuse to bring in […] back in when she was there because she said that everyone works better together. Bootstrappers know that you can’t get just as good work done remotely but all these companies were facing this norm that was pervasive. Finally, COVID is forcing people to make this change. Now, these big companies are waking up to this idea of, hey, you’re not having your employees drive an hour or two from the office. They have simpler lives. Maybe, they’re getting more work done because they’re faced with fewer distractions from being in the office. I’m looking forward to seeing how this plays out in the next year. Hopefully, as COVID gets better and maybe things are opening up again. I’m hoping that like Dropbox, these other co-companies will also have these policies put in place and that employee’s lives, hopefully, will match something a little bit closer to how bootstrappers have learned to work from home or at least have learned to work from home.
Rob: Einar, you live South of the Bay area. I bet you’re seeing lower traffic now that people are working from home. Do you feel like this is going to change the landscape of these big campuses? I know Facebook. My brother and dad worked in the electrical contracting industry in the Bay Area for years. They were part of doing work on the massive Google campus, the massive Facebook campus, the massive CISCO campus, and all of that stuff. Is that done at this point? Do you think most companies are going to wind-up going at least half remote or work from home permanently?
Einar: I don’t know. I’m torn on this whole subject just like the resident extrovert here. I certainly think like some of the traditional views. I saw some venture capitalists on Twitter making a big deal about the fact that they’re no longer going to make it a requirement when they invest or a qualifier that a company has an office before they invest, which I always thought was really stupid. On the other hand, I do think there might be backlash once the vaccine’s in place. I feel cooped up just in my home office, not seeing people just day-to-day. There’s value in interacting directly face-to-face with people, but there will be a fundamental shift in the expectation probably mostly from the employee side. It will probably start with tech companies and then trickle down where maybe they’ll be there a portion of the time. Maybe they work from home 2–3 days a week and then in the office a couple of days a week. What Dropbox is doing is smart because that facilitates that thing, which, in general, is a good thing. We’re already seeing it just in the real estate markets in the Bay Area. The shift where it’s not a good time to own a one-bedroom condo in downtown San Francisco because everyone is just moving out and buying cheaper, bigger places elsewhere. It’s definitely a trend, but do I think it will become everything is remote-first and offices are going the way of the dodo? I don’t really buy that, but I guess we’ll see. In general, commercial real estate is a bit screwed, particularly in California if Prop 15 passes where the tax increases and things. I don’t know what they’re going to do. It follows on from the fall of shopping malls because e-commerce has taken over. They’re just empty malls everywhere. What are they going to do with all of that real estate? The questions are almost the same even if it’s a small trend, like you say 20% of companies or 20% of employees don’t go to offices regularly, that’s a big drop in the occupancy rate of these places. What are we all going to do with this office space that isn’t being used anymore?
Tracy: Couldn’t we convert some to housing?
Einar: That’s what I think. There’s a mall in town where I live. I looked at them and I’m like, why isn’t that converted into an apartment complex at this point? I don’t think that this is going to fill out again in any way, shape, or form. I don’t see why it can’t be a hybrid: partial apartments and partial shopping-restaurant complex. That stuff takes time, I guess.
Rob: For me, I’ve always been a believer that a lot of the companies that have been remote—the larger companies, let’s say a company with 50–500 employees that is remote—tends to be a lot of introverts. They do tend to hire people who work well remotely. We haven’t done an experiment this large, to your point Einar, with companies that didn’t hire specifically for remote workers or have more extroverts, just more of an extroverted workforce. We got the balance right with Drip when we’re in Fresno. There were 10 of us, and there were some people that were fully remote. They were in New York and I went to other states to find the best people; that’s what I had to do. Everyone in Fresno, we came to the office two or three days a week. The third day was optional. I saw Derek, I saw Anna, and I saw my co-workers. When we sold, we moved to Minneapolis, it was three days a week mandatory. It was Monday and Thursday, everyone had the option and most people just work from home. That is such a good arrangement, especially if you have to do any type of maker time. When I’m at home, I would try to block off and not have as many meetings on those days. I like to keep the mornings to myself, and I would have zero interruptions. In the office, I got social time. We did a lot of whiteboarding, but I get interrupted all the time. At a certain point, I said, I’m no longer a maker. It’s just not going to happen in an open office space. I hear you on that. I don’t know if there will be a transformation of these office spaces into living space, if they alter the form into escape rooms and trampoline parks. I see a lot of these warehouse districts. That’s a thing. It will hurt commercial real estate. The rates on a startup office space are higher than the rates you can charge a trampoline park or whatever innovative new entrepreneurial thought does come out of this. There will be a hit but we’ll just have to see how back to normal things get once there is a vaccine and things start to clean up.
Einar: That’s true. Even if you just take your example, if the majority of companies end up adopting what you’re saying, that’s two days out of five. That’s very low-low.
Rob: Yeah, then we’ll have to figure out, we just paid the rent as if we used it because we had it for 30 days a month. We had it 365 days a year, we just didn’t use it all the time. That was the decision we had to make.
Einar: You could end up with a scenario where two companies split it. You have Monday, Tuesday, Friday, or maybe both of them come in. Everybody comes in on Fridays. That’s a big party. You can see those types of situations.
Rob: Yeah. The fact that WeWork has had some major issues and has tanked pretty bad, but can you imagine if there were a more successful, more sustainable model that a lot of these are just turned into shared office space, into more of a WeWork model. I wonder if there becomes an opportunity, there’s that old phrase of like, I want to be the second buyer of everything because the first buyer, the first investor puts a ton of money in, they burn through it, they prove out the model, and then when that goes out of business, I can buy it for pennies on a dollar. Now I have this asset that there’s an opportunity. I wonder if there isn’t going to be that in commercial real estate in terms of office space. Our next topic is an interesting one. Listener, follow me along with this. This isn’t as relevant to someone who’s running an extreme early-stage startup. I know more than one founder who has hit the point where they’re doing (let’s say) $2–$10 million in ARR, they go to try to raise money, and they don’t want to go the venture unicorn track, but they do want to have some liquidity perhaps for themselves or to pump into the company to continue to grow. There’s a couple of things that tie into this. The bottom line is due to the regulations in the US, it’s virtually impossible to do that. It’s not worth it because of the high expense of going public in the US. First is in Canada, there’s the Toronto Stock Exchange and in Australia, there’s (I think) the Australian Stock Exchange; I forgot the name of it. In Toronto, if your company’s market cap is $4 million, you can go public on their exchange. The fees are between $10,000 and $200,000 depending on how much money you raise. It’s actually quite inexpensive. You could imagine a SaaS app, much like you would meet at MicroConf who’s doing $3, $4, $5 million a year going public. The phrase ‘going public’ has such gravitas with us. It’s like only GE, Apple, and Google are public, these are master companies, but I don’t think that should be the case, actually. Einar, you want to walk us through a little bit? We have a couple of topics to touch on here. One, why the hell is it so expensive and hard to go public in the US. And then, the real topic that leads us into is these things called SPACs which are Special Purpose Acquisition Companies and they’ve been in the news quite a bit lately. I’ve heard them on This Week in Startups and there’s a Forbes piece on them. They are suddenly becoming a popular way to go public in the US.
Einar: It is slightly strange. I think most US investors don’t really look abroad. They just think this is the way it’s become. The trend over the last 10–15 years has become that even though this (perhaps) does not have your regulations than they already were, you end up in a scenario where a company like Airbnb is going public after (maybe) 12 years of existence instead of the more typical which is a decade or plus ago with 4, 5, maybe 6 years. It is slightly weird to me that you have to be one of a small number of unicorns in order to go public. As you mentioned, that’s just not the case in other countries. There are dedicated exchanges like the TSX Venture Exchange in Canada. Being Norwegian, I know there’s one called […] in Norway. There’s a couple of ones in Germany. Basically, people understand that if you’re buying stock on this exchange, then yeah, there are some compliance and things, but these are much riskier bets than your GE, Google, Apple or things like that. On a philosophical level, I don’t really understand why that is impossible. Investors can go on the Robinhood app—like I did—and buy a bunch of put options on United thinking that Donald Trump is going to announce some sort of a vaccine before the elections so it’ll jump up. You can lose all your money as I did in a week. Nobody’s stopping you. There’s no accreditation process or doing that. The stock market is, as we in part of seeing through COVID, to a large degree is a good way to lose a lot of money very quickly. But fundamentally, I think one of these things should exist in the US where if you get a certain size, as you say, $5–$10 million in ARR, why not go public? Companies like that go public all the time abroad. It gives access to retail investors who don’t have access to private markets. Fundamentally, the fact that things take longer to go public means that the average investors who don’t have inside access don’t get to participate in the value creation there. I think I actually like SPACs—to circle back to the topic at hand. SPAC’s a sort of a symptom of this problem. SPACs are basically like empty shell companies that people put together and they go public. They list an empty company, the company basically says, we’re going to sell $500 million worth of stock in our company—in the shell company—and then turn around, use that capital to buy or acquire a private company. Effectively, it’s like a backward IPO almost. The company becomes a public company by virtue of being acquired by the shell company. My view is that that sort of a symptom of how complicated and how long it’s taking for all of these companies to go public. I think we’ll start to see more and more of that trend. I’m sort of pro at it. I don’t think there’s any reason why more companies shouldn’t be public so that more investors get access to the value creation that obviously happens there because you get to $10 million, as you say, what’s your option at this point? It’s to sell to private equity, to sell a portion to private equity for some liquidity and things. But are they really giving you the best price? Wouldn’t it be better to just sell 20% of your stock to the public and not have basically one boss who may have the wrong view of how you should grow and what your strategies should be going forward?
Rob: Yeah. I think SPACs are kind of a loophole or a workaround to what I would say an overly regulated, overly complicated system. I certainly think there need to be investor protections. Yes, most of the laws that are governing all of these were written in 1935. They haven’t really been updated. There was the jobs act that was a little bit for crowdfunding, but really, there are still a lot of problems with what’s going on today. Tracy, you’ve witnessed it first hand as we’ve been raising funds for TinySeed Fund II. Einar came back to us because he was doing research and he said, if you raise a venture fund, which is what TinySeed’s raising and you’re raising more than $10 million, the highest number of investors you can have in that fund, these are accredited investors who either have a million dollars or more in liquid net worth, not including their primary house or they have an income of $200,000 a year for the past two years or $300,000 if they are married. To put this, the definition of a sophisticated investor in the United States, even then, you can only have 99 of them in your fund. If you want to raise, for example, a $40 million fund, you need people to give you your minimum investment to be $400,000 per as average out to that, which is kind of crazy. Because if you could have a thousand investors, then you can drop your minimum way down and you could make it more accessible to so many more people. I think given our love of what we are doing and our belief in this space, that we would prefer for more people to be able to participate. But I’m curious, had you heard of this 99 investor problem before now and any other thoughts on it?
Tracy: This issue really goes back to me as someone who isn’t an investor, has always dreamed about becoming an investor, kind of a baby investor. Coming into TinySeed, I had no idea about what went into raising a fund and being a part of a fund. TinySeed’s thesis, which you put on our website—working here, I totally agree with it—we’re talking about TinySeed being an index fund into B2B SaaS. When you’re talking to people who can be a credit investor, that those require you have before but maybe just barely meet those requirements, a lot of people are very into the mission we’re doing, a lot of people don’t have $400,000, but they’re like, hey, this sounds like a winning bet to me. I love to put it in 5000. It sucks to be like, no, we can’t. We can only talk to the people who already have enough wealth that they can just blow this massive amount of money into TinySeed. It creates this problem between wealth equality in a way that people who are coming from disadvantaged backgrounds have a hard time getting to that level of wealth to be able to throw around that amount of money. When we have something like TinySeed—again, I totally believe in what we’re doing, think they were going to be a success—I want to help other investors, especially from disadvantaged backgrounds, also be a success with us and we have to constantly tell them no. It just drives me absolutely at the wall. The fact that the 99 investor problem exists—Brad Feld wrote a blog post about this if you Google for it—it’s frustrating. And because in 2018, President Trump signed (I think) the startup act or whatever, that was hoping to solve this problem between 99 investors being allowed to invest to be in a fund by opening it up to 250, if I recall. But that only applies to funds that raise less than $10 million, which is ridiculous, because the funds are raising more than $10 million and need to have more number of investors who are able to invest in it. I feel like it’s a huge issue. It leads to the restriction of wealth growth to these already wealthy people. It’s like I can go to a casino, I can spend $5000 in a casino, and no one would bat an eye. But I can’t take $5000 and try to invest it in some larger fund which, because they’re kind of indexing, arguably might have more chance to succeed that’s not allowed for me because those funds are restricted to only large investors. It’s just bananas.
Einar: I obviously agree. I talk to investors all the time and I tell them, I’m sorry, our minimums are minimums. People get frustrated and they’re like, you know, I want to put $50,000 into this. Often, they’re successful operators. They’re people who maybe bootstrap to SaaS business, got it to a million or two, sold it, and now they want to put some money into the area that they understand. In part to support the community and in part to obviously make a return. The crazy thing is, it’s already even worse than that because technically speaking, there are two definitions of investors. There’s more, but the main ones are the accredited, which is what you’re saying. Really, then you’re a pretty wealthy person if you qualify as an accredited investor. But there’s a higher threshold called a qualified purchaser. Basically, what a qualified purchaser is is somebody who has at least $5 million in investments. That’s obviously wealthier than someone who is “just an accredited investor.” But the funny thing is, that you can actually take off the 1999 qualified purchasers. What that means is, our minimums, and any fund’s minimums can be lower for the wealthier investor. Which doesn’t make any sense. I can take $5000 from you if you want to, but only if you’re worth at least $5 million. If you are “only worth $2 or $3 million,” well, I’m sorry, but then I have to take $400,000 or whatever the minimum for the fund size is. That doesn’t seem to make any sense to me. I don’t know that I’ve ever read a good reason why the limit is 99. I don’t understand why it should be like a thousand. You don’t want something that turns into a scam, then gets a million investors caught up in it, but 99 just seems really arbitrary.
Rob: If it was a million then it’d be a public company. If you had that many […] public. But you’re right, there’s a big difference between 99 and a million. We’ll see what happens. I’m just throwing my hands up and being like, somebody needs to figure this out because I do believe this is hurting innovation. Much like the high cost of healthcare in the United States, I think the regulation around going public and the regulation around 99 investor limits on funds, those three things are the things that I have experienced first hand over the past year or two, that are seriously impacting the startups that I’m working with. Not only with TinySeed, but just all around MicroConf and the people listening to Startups For The Rest Of Us. Hopefully, we can do something about it and I would be remiss if I did not recommend people go check out tinyseed.com/thesis. If you click through there, you can of course send Einar an email. You fill out a form and he gets an email, and you could chat with him to hear about the TinySeed thesis and to hear more about what we’re up to and how we’re raising that fund. Our last story of the day is from Reddit and it’s a warning about Glassdoor. The person says, “For the past few years, I’ve often defended Glassdoor as a useful resource, as part of any job seeker’s overall job-seeking toolkit. About a year-and-a-half ago, I interviewed with the company that had horrendous reviews.” This is a thousand […] summarized from here. In essence, there were a lot of negative reviews, the person took the job anyway, the job was not good, and the environment was toxic according to this poster. They wind up going back to Glassdoor and posting a negative review, that then not only got removed but every one of this person’s reviews on Glassdoor was removed. They implied at the end of their post that they’ve heard that Glassdoor has supposedly done a minor pivot into brand management so that perhaps it’s becoming less reliable than it’s trying to get rid of negative reviews or something to that effect. The question I have is maybe two-fold and we’ll start with you, Tracy. Glassdoor has tended to be a bit of a mixed bag, but I’ve used Glassdoor quite a bit for salary recommendations which I find to be pretty reliable. I also used it back when I looked at lead pages, Glassdoor as an example when we were talking about being acquired by them. There have been companies where I have tried to research whether I think they have a positive or a negative reputation with their employees. I have always wondered, much like Yelp and much like Amazon reviews, these things do get gamed eventually. I’ve always had in the back of my mind, I wonder how reliable these actually are. Do you have much experience with Glassdoor and what are your thoughts on this whole topic of can this be a game, do we think that as something gets big, eventually it just does lose its value because they can’t control the potential review spam?
Tracy: It’s just funny to me because I’ve never used Glassdoor other than for salary information like you mentioned. A previous company I worked for had Glassdoor reviews and they were terrible. It was the funniest thing to me. I believe one of the large reasons why they completely renamed and rebranded the company was because their Glassdoor reviews were so terrible and they needed to have some way to wipe the slate clean. This was about seven or so years ago. There are probably a lot more systems to game it now. But back then, you just had to wipe the slate clean in order to get rid of those past reviews. I have checked them recently and they have better reviews before. I assume that they made some management changes in addition to rebranding the company. It’s definitely been games in the past in a very complicated matter like that. I absolutely think it’s being games now. I read that article, that Reddit post they are mentioning. It’s just like Yelp. All these companies are going to be very concerned about their reviews because it’s going to vastly affect the quality of the employees they get. Savvy employees are going to leave bad reviews and they’re going to stay away. Now, these companies are going to be doing whatever they can to either with Glassdoor or otherwise to scrub those reviews just like Yelp. I think what’s going to happen, just like Yelp, I think people are going to use it less now that these things are coming more in the forefront. But I’m curious to hear what you two say about this.
Rob: I’m wondering if this does open up the door, the opportunity for a new Glassdoor competitor to come in and have a better algorithm from the start or some other way of validating this stuff that then becomes reliable for a few years and then the same thing happens. Einar, do you have thoughts or experiences with Glassdoor?
Einar: I don’t have much experience specifically with Glassdoor. But I do think in general, anonymous reviews of things, I think it’s prone to gaming in general. I think you’re right. I think there’s probably a way to make Glassdoor not so easily gameable, but it doesn’t surprise me at all that companies will want to try to do it. Like I said, one of the hardest things—recession talk aside—is to get people to want to work for you, to get quality people to do, and if you have a horrendous review on Glassdoor that says this is the worst place in the world to work, that’s going to be a problem. I think in general. As I said, it’s a little bit like Yelp reviews. Do you really know or is it somebody who has a real aversion to creamer in their coffee and this particular way that this café does it and decides to make it their mission to take this café down? That’s hard to know.
Rob: Yeah. Obviously, if you listen to this, you’re probably at a pretty early stage. Maybe 0 employees, maybe 10 or 20 employees, I do think at least for now that people will go to Glassdoor. If you have no profile, that’s probably fine, because you just say, we’re so early that we don’t have one. The danger is, if you don’t have a profile, someone leaves a negative review, and your only review is negative. I would consider having some type of presence on Glassdoor if you are going to be doing the hiring and you do have at least a couple of employees. You can ask folks, hey, can you just post an honest review of your experience here? I don’t know that this needs too much more commentary or thought, but I do think that’s the problem of these big reviews, especially anonymous reviews. That’s the thing. Yelp, you can effectively be anonymous. You could, over time, can buy accounts on Yelp that have already great reviews. You could set up a new one, leave a bunch of positive reviews, and leave negatives. There are ways you can do that and these things just tend to be really hard if it’s not tied to some identity.
Tracy: As I say, being a Yelp Elite in the early days of Yelp was pretty sweet in the Bay Area. I say as a former Yelp Elite.
Einar: Wait, what’s a Yelp Elite?
Rob: Oh man, you are not in the know.
Tracy: I know right? I was like, how do you not know this? They have this whole program that if you’d left enough reviews—if I recall correctly— you’ll be invited into the special Yelp Elite program and then you will get invitations to restaurant openings and special events. The idea is that they will give a bunch of free food and alcohol and give positive reviews afterward. There was this one summer—quite a while ago for me, like 10 years ago for me—where pretty much every weekend I was drinking for free based on being Yelp Elite.
Einar: What? Oh my God.
Rob: You’re famous. Tracy Osborn, you are @tracymakes on Twitter, and Einar you are @einarvollset. We will link both of those up in the show notes. Einar, thanks so much for joining me again on Startups For The Rest Of Us.
Einar: Thanks for having me.
Rob: And Tracy, thanks for coming on.
Tracy: Happy to be here.
Rob: I really appreciate Tracy and Einar taking the time to record this with me. I hope you enjoyed this episode format. I’ve done just a handful of them over the past several months. If you really enjoy this type of format, please write in questions@startupsfortherestofus.com or hit me up at Twitter @robwalling and let me know what you think. If you think they could be improved or if you just love to hear them more often. I’ve only done them maybe once a quarter, both due to the lack of new stories that are maybe discussion-worthy in our community, but also, they’re a little more effort to set up. But I am willing to do that if I hear resounding yes, yes, yes, this is something that I’d really love to hear. Thanks again for joining me this week and I’ll be in your earbuds again next Tuesday morning.
Tracy: Yeah, happy to be here.
Rob: Einar, you as well.
Einar: It’s very good to be here.
Rob: It’s good to have the band, I was going to say back together, but this is the first time the three of us were appearing on the podcast. I think it’s cool. You both have made multiple appearances over the past 12–15 months, but I haven’t done too many of these. I get a lot of requests to do the three- and four-person news roundtables, but they tend to be pretty hard to plan. The logistics are tough, and then it’s oftentimes hard to find enough topics that really relate to our crowd. We can talk about stuff that is broader news. Jason Calacanis says this with great success on This Week in Startups, but he’s relating it to the world. He’s talking about trade policy and this and that, and I find that it can sometimes be hard to link that back to boots on the ground, MicroConf, Startups for the Rest of Us, TinySeed-type startups. But I do think we have a good docket today. The first topic we’re going to cover is a listener question about the economy. It’s from an anonymous listener. He said, “Early on in the pandemic, you described a broad revenue trend along the lines of, about 20% of companies that you’re invested in or had the financials off their way down, 60% had a minimal difference and 20% are way up.” This question asker says, “Hey, we actually landed in that 60%.” I said that off the cuff one day and then I came back to it a week later. I looked at the numbers and it wound up being closer to 15%, 70%, and 15% for what it’s worth. Give or take, it doesn’t really matter. He says, “So, here is the question. It’s 6–7 months later, what does that picture look like now? I suspected a lot of us in that initial 60% group are starting to feel signs of a real recession. Maybe a few extra customers churn, maybe customers feel renewed but get lower users. The effects aren’t huge, but they’re there. My sample says it’s small but I’m seeing it. It’s not falling revenue but it’s flat where I had expected growth. There’s a lot of reasons why people don’t want to admit this stuff. Revenue failing to hit forecasts is not a good look. Disappointing looks are hard to face. No one wants to consider the implications of that for themselves or for others. If other startups out there are seeing signs of this, it might be helpful for the community to know what to look for and what to do about it. My business is fine and we have a broad customer base, but I’m curious to see what you’re seeing out there in the space.” Einar, you want to take this first?
Einar: Sure. My view is things haven’t changed all that much. I still think the breakdown is roughly what you said. Particularly SaaS businesses that are serving industries—whether that’s travel, schools, or restaurants and things—I still think they’re hurting. I don’t think it’s quite in the same deep freeze as it was back in March–April time frame but certainly, a lot of those companies are still hurting. I don’t think it has expanded necessarily. I do think on the other 15% side, the growth spurts that came for the winning companies have slowed down a little. We saw some companies, in particular—before COVID were growing 30%, 40%, 50% a year—who all of a sudden grew 100% in 3–4 months because they were at the forefront of whatever, work from home, or something that’s COVID-related. We’re starting to see more normalization for these guys’ growth rate. Some of them are back to where they were, 30%–40%. Some of them are coming down off the peaks and perhaps stabilizing at a higher base. Certainly, that’s true (for example) with things related to ecommerce, delivery things, and stuff like that. In the middle, I don’t know, actually. I’m not 100% sure. I feed bad for the question asker. I want to say, yeah, that’s what I’m seeing all over, but that’s really not fully what I’m seeing or at least hearing. People are still tentative. Budgets are harder to get on and approvals are a little harder, but I’m not sure that it’s going to slow down into the fall, from the people I talked to, anyway. It’s peculiar to this small sample size.
Rob: Tracy, you have insight into at least 23 companies across TinySeed batch 1 and 2. What are your thoughts?
Tracy: One thing I was wondering about this question in terms of timing—and I was going to post a question to you, too—was the possibility of things sliding to a recession, but also worrying about that happening while we’re also going into the holidays. What is the drop in growth? Is that something that happens with startups? It’s something that happened with me in my previous startup because we were so…
Rob: Seasonal?
Tracy: Exactly, we were a seasonal startup. I was wondering if people were like, oh, should I be worried about a recession if it’d be worthwhile to go over what you just see go into the holidays—keeping in mind that holidays are in COVID so things are going to be weird—versus if it’s a recession, how that’s affecting your business.
Rob: My thoughts there are obviously if you’re an ecommerce, Black Friday’s coming up. Any type of ecommerce SaaS, software, or whatever is going to be going up into the right over the next month, and then it’ll drop down in Q1. I saw seasonality in all of the companies that I’ve run. It wasn’t seasonality; it’s too strong. I would see (usually) dips in growth, especially if it was SaaS. It wasn’t the revenue drop, but it was the growth that would slightly decelerate. We get fewer signups right around tax day in the US—mid-April—and then around December. I was counting it lucky if December grew at all. If we stayed flat, that was fine, but I really wanted to have a good November. Then, we would come out swinging pretty hard in January. We often launch big things in January.
Tracy: That’s exactly what I was getting at. I’m curious to see how things would happen in January, also depending on US politics, where we are in COVID. This going […] and getting at is, is it too early to say about the recession, being that there are other things going on?
Rob: The uncertainty of COVID, the uncertainty of US elections and holidays coming up, I can see them making people uneasy and not wanting to purchase. The question asker, his business is flattening or not growing as fast. It could be justified by that. I’m invested in between TinySeed and my independent staff. I have 35 investments, and I’m not hearing that there’s slowing down. I’m not seeing plateaus or slowing across the board. There are two questions here. One of them, I may be answering with no, I don’t think everything is flattening right now yet. The second question he’s asking implicitly is, do you think there is a recession on the horizon when we look out 3–6 months? For me, it’s a big I don’t know. I was talking in 2015–2016, there has to be a recession coming. There was in 1989. Well, no. There was one in 1993, there was one in 2000, there was one in 2008. I kept thinking it’s not that it’s every seven or eight right years, but this has been going on, the stock market’s really overpriced. When I sold Drip and had all this cash, I remember just agonizingly investing in the market. I was like, I’m waiting for this thing to be cut in half any day. That really didn’t happen until COVID. It happened in January of 2016. There was a big correction but it came back the next month, so there’s no recession there. The next big hit obviously was when COVID started, but it was so short-lived that I don’t know what’s coming.
Einar: Well, it was short-lived. There’s sort of a binary outcome to start. I don’t know if we’ll be turning to a stock discussion program here, but if you look at the companies that are listed on the stock industries, you see that basically the reason it’s recovered is because of the big tech firms like Amazon, Facebook, Twitter, Zoom, those kinds of things. They’ve done really, really well, versus the Russell 2000 which was the small-cap companies that are listed. They really haven’t recovered. They’re still down 20%–30%. It’s been a story of two different trade industries, which also partly backs up my view of the market. This relates to M&A, too, in the software space. It’s been very strong. If you’re in software or anything semi-positive, like you had tailwinds for at least the last few months now. Today, I think the Dow is down 3%. There’s obviously a lot of uncertainty around the elections. Who knows what’s going to happen with the vaccine and things, but certainly, the last 3–4 months, if anything, I’ve seen tech firms have tailwinds through the last few months at least.
Rob: I think you’re combining two things because you’re talking bear market, bull market, and stock prices, and I’m thinking more recession or not. I’m thinking of SaaS companies just getting started to several […] and revenue, mostly bootstrapped, are they still growing? Even about the retail store here in town, they don’t necessarily care about the stock market. It obviously impacts the broader economy, but when I think about it, if I was running a SaaS company today—whether I was doing $100,000 a year or $5 million a year, and I was, again, bootstrapped or mostly bootstrapped—I would be slightly cautious right now because of how much uncertainty there is. None of us can predict a recession, but there are a lot of things that can go wrong in the next six months. Personally, I’m fairly risk-averse especially when I’m running a company that I don’t want to lay people off. I don’t want things to go to zero. I don’t want to miss payroll or whatever it is. I would be thinking about being a little bit conservative or having a little more of a cash cushion than I would have in the boom times. I mean, you go back a year, you don’t need so much of a cash cushion if you’re going 10%–20% a month. Right now, I would be thinking about, what are my plans B, C, and D if things start to go sideways here? What if growth flatlines for six months, are we good? I’ll be asking myself some what-ifs and figuring out which of these could be company impacting
Einar: Yeah, I think it’s fair. And buy some Bitcoin, obviously.
Rob: Oh my gosh. Tracy, you’re on crypto?
Tracy: My husband is very into crypto, but I am not. I’m sorry, I’m going offhanded here. It’s fun being adjacent to that world but then listening to Einar and his thoughts.
Rob: Einar is just in it for the big score. I definitely know crypto that people who listen to podcasts know that I dollar-cost averaged in. I blend it on these big runs because right now it’s up. I do a little with a dollar-cost averaging out, so I feel good about that. Our next topic is a story from the New York Times, and it is about the Google antitrust suit. The US accuses Google of illegally protecting a monopoly, the Don’t Be Evil moniker that Google had for many years. A lot of us especially small startups who have experienced whether it’s direct competition, whether it’s being stepped on accidentally, whether it’s having AdWords constantly being more expensive, whether it’s having our keywords be not provided, whether it’s having them not send us traffic because they’re doing snippets at the top of the homepage, I definitely think there is a sentiment in early-stage startups that certainly, Google’s doing something that may not be fair or encouraging of the ecosystem. Tracy, what are your thoughts on this antitrust suit and how do you think it impacts the startups in our community?
Tracy: Google just feels like it owns everything. It has its fingers on everything intact, and you can’t avoid them. People are still talking about Superhuman—this other email thing—while everyone’s like, oh, but Gmail’s the best. You’re like, okay, I won’t talk about advertising, Facebook advertising, Reddit advertising when really, Adwords is a thing you have to start out from. You get a new phone, and Google is on your phone. That’s what you said earlier, that’s a lot of these antitrust cases about the phones and everything coming with that bi-standard. I’m a fan of any kind of breaking up at least a little bit because I feel like Google being in all these areas and having its fingers in everything is slowing or preventing some amount of startup innovation in those spaces. What will we see if Google wasn’t number one in everything that we do? In some way of breaking it up and allowing for more innovation from people, where would tech be if Google wasn’t the behemoth that it is right now?
Einar: Ditto. I broadly agree with that. The specific case that the DOJ brought against Google is pretty narrow. If you read it, they’re saying like, okay, it’s antitrust to protect their search monopoly by paying billions of dollars to Apple and whatever to make Google their default search platform. Broadly, I agree. It feels a little bit similar. It’s like Google is walking towards the situation that Microsoft was in years ago back in the 90s. Microsoft was the big bad wolf that squash you, outcompete, buy you, or do whatever. It’s funny that basically, Microsoft got sued by the DOJ for antitrust when they were 22 years old, and Google is actually 22 years old this year. It’s almost like a college graduation thing, like, congratulations, you made it, here is a lawsuit from DOJ. You look at what happened with Microsoft when they did face that sort of thing. That’s overall been good for the startup ecosystem, that stranglehold that they had on tech. There are two ways to look at it. Either the fact that they go sued and things open up some innovation, but then the flipside of that, too, is people have to work around that monopoly to a large degree. That’s why you get WebApps and things when you did in the early 2000s. I don’t know. It’s one of those really big market-moving things, a direct impact on bootstrap software entrepreneurs. It’s more TBD, to be honest with you.
Rob: The big thing that I’ve seen Google do over the past 15 years as I’ve been more involved in the ecosystem, as I’ve started running Adwords, that has been anti-innovation or anti-startup directly, is this slow titration or this decrease in the amount of data that they give to people who are trying to market their businesses. When I started pulling keywords out of Google Analytics, they give Not Provided instead of the actual keyword people were using to search their site. Before Not Provided, I was a small business that was marketing on the internet. I was either doing SEO or was buying AdWords, but it would tell me, hey, they clicked through this keyword and they converted. This keyword converts really well for you. They pulled it out and they gave some […] excuse about it being privacy. First, it was only SSL and then they just rolled it out to everything. What it did is it forced you to buy ads from them. If you buy their ads, they give you the keyword. So how is it so? It never made sense. There was a bunch of uproaring, and Google said we don’t care. Then, they slowly pulled all the data out. Their keyword tool is completely useless now. They said they would never sell search rankings, but if you just search for any term, the top three, four, five positions now are all ads. The organic number one is oftentimes below the fold depending on how many things you have on your screen. You can’t even identify the damn ads. It’s a tiny little box. I had to teach my kids that those were the ads. My mom still—I’ve watched her using the computer—clicks on the top result every time. I’m actually like, oh, you just cost that store money. She’s like, why? I was like, well, you clicked on their ads. She’s like, how is it an ad, it’s a top search. People don’t understand. That’s not what this suit is about. This suit, to be clear, is about the default search engines on these mobile devices. It’s all intertwined. It’s a lot like Tracy said. They are everywhere. Do I believe that they have used monopoly-like powers to just throw their weight around and not care what the market says? I do.
Einar: Oh, yeah. Just ask Mike Taber. The hoops he had to jump through to be able to get to what effectively is the default email client in the world. That’s something that Google can do. All the big boys do it. Twitter is famous for yanking their developer API after the developer helps them become famous and become popular in the first place. I agree with that.
Rob: Our next story is about Dropbox. I’m reading this on businessinsider.com. By the way, we will post all of these stories in the show notes. The headline of this story is, Dropbox will let all employees work from home permanently as it turns its offices into WeWork-like collaborative spaces. Shouldn’t they just say coworking-like collaborative spaces? Why does it have to be WeWork-like? That’s interesting. It’s like saying, Kleenex instead of tissue, or Band-Aid instead of a bandage. Anyway, in essence, Tracy is this just the rest of the startup world? The Silicon Valley startup world is finally catching up to what bootstrappers have been doing for the past 10 years because we didn’t have the money for offices?
Tracy: No kidding. There’s a lot of negative effects from COVID and the effect around office spaces. There are just these norms that once you got to a certain size, you had this office space. What was it? Yahoo! used to let you work from home, then Marissa Mayer became the CEO and she rescinded that because that was the norm. Yahoo! is innovative before but they’re using that as an excuse to bring in […] back in when she was there because she said that everyone works better together. Bootstrappers know that you can’t get just as good work done remotely but all these companies were facing this norm that was pervasive. Finally, COVID is forcing people to make this change. Now, these big companies are waking up to this idea of, hey, you’re not having your employees drive an hour or two from the office. They have simpler lives. Maybe, they’re getting more work done because they’re faced with fewer distractions from being in the office. I’m looking forward to seeing how this plays out in the next year. Hopefully, as COVID gets better and maybe things are opening up again. I’m hoping that like Dropbox, these other co-companies will also have these policies put in place and that employee’s lives, hopefully, will match something a little bit closer to how bootstrappers have learned to work from home or at least have learned to work from home.
Rob: Einar, you live South of the Bay area. I bet you’re seeing lower traffic now that people are working from home. Do you feel like this is going to change the landscape of these big campuses? I know Facebook. My brother and dad worked in the electrical contracting industry in the Bay Area for years. They were part of doing work on the massive Google campus, the massive Facebook campus, the massive CISCO campus, and all of that stuff. Is that done at this point? Do you think most companies are going to wind-up going at least half remote or work from home permanently?
Einar: I don’t know. I’m torn on this whole subject just like the resident extrovert here. I certainly think like some of the traditional views. I saw some venture capitalists on Twitter making a big deal about the fact that they’re no longer going to make it a requirement when they invest or a qualifier that a company has an office before they invest, which I always thought was really stupid. On the other hand, I do think there might be backlash once the vaccine’s in place. I feel cooped up just in my home office, not seeing people just day-to-day. There’s value in interacting directly face-to-face with people, but there will be a fundamental shift in the expectation probably mostly from the employee side. It will probably start with tech companies and then trickle down where maybe they’ll be there a portion of the time. Maybe they work from home 2–3 days a week and then in the office a couple of days a week. What Dropbox is doing is smart because that facilitates that thing, which, in general, is a good thing. We’re already seeing it just in the real estate markets in the Bay Area. The shift where it’s not a good time to own a one-bedroom condo in downtown San Francisco because everyone is just moving out and buying cheaper, bigger places elsewhere. It’s definitely a trend, but do I think it will become everything is remote-first and offices are going the way of the dodo? I don’t really buy that, but I guess we’ll see. In general, commercial real estate is a bit screwed, particularly in California if Prop 15 passes where the tax increases and things. I don’t know what they’re going to do. It follows on from the fall of shopping malls because e-commerce has taken over. They’re just empty malls everywhere. What are they going to do with all of that real estate? The questions are almost the same even if it’s a small trend, like you say 20% of companies or 20% of employees don’t go to offices regularly, that’s a big drop in the occupancy rate of these places. What are we all going to do with this office space that isn’t being used anymore?
Tracy: Couldn’t we convert some to housing?
Einar: That’s what I think. There’s a mall in town where I live. I looked at them and I’m like, why isn’t that converted into an apartment complex at this point? I don’t think that this is going to fill out again in any way, shape, or form. I don’t see why it can’t be a hybrid: partial apartments and partial shopping-restaurant complex. That stuff takes time, I guess.
Rob: For me, I’ve always been a believer that a lot of the companies that have been remote—the larger companies, let’s say a company with 50–500 employees that is remote—tends to be a lot of introverts. They do tend to hire people who work well remotely. We haven’t done an experiment this large, to your point Einar, with companies that didn’t hire specifically for remote workers or have more extroverts, just more of an extroverted workforce. We got the balance right with Drip when we’re in Fresno. There were 10 of us, and there were some people that were fully remote. They were in New York and I went to other states to find the best people; that’s what I had to do. Everyone in Fresno, we came to the office two or three days a week. The third day was optional. I saw Derek, I saw Anna, and I saw my co-workers. When we sold, we moved to Minneapolis, it was three days a week mandatory. It was Monday and Thursday, everyone had the option and most people just work from home. That is such a good arrangement, especially if you have to do any type of maker time. When I’m at home, I would try to block off and not have as many meetings on those days. I like to keep the mornings to myself, and I would have zero interruptions. In the office, I got social time. We did a lot of whiteboarding, but I get interrupted all the time. At a certain point, I said, I’m no longer a maker. It’s just not going to happen in an open office space. I hear you on that. I don’t know if there will be a transformation of these office spaces into living space, if they alter the form into escape rooms and trampoline parks. I see a lot of these warehouse districts. That’s a thing. It will hurt commercial real estate. The rates on a startup office space are higher than the rates you can charge a trampoline park or whatever innovative new entrepreneurial thought does come out of this. There will be a hit but we’ll just have to see how back to normal things get once there is a vaccine and things start to clean up.
Einar: That’s true. Even if you just take your example, if the majority of companies end up adopting what you’re saying, that’s two days out of five. That’s very low-low.
Rob: Yeah, then we’ll have to figure out, we just paid the rent as if we used it because we had it for 30 days a month. We had it 365 days a year, we just didn’t use it all the time. That was the decision we had to make.
Einar: You could end up with a scenario where two companies split it. You have Monday, Tuesday, Friday, or maybe both of them come in. Everybody comes in on Fridays. That’s a big party. You can see those types of situations.
Rob: Yeah. The fact that WeWork has had some major issues and has tanked pretty bad, but can you imagine if there were a more successful, more sustainable model that a lot of these are just turned into shared office space, into more of a WeWork model. I wonder if there becomes an opportunity, there’s that old phrase of like, I want to be the second buyer of everything because the first buyer, the first investor puts a ton of money in, they burn through it, they prove out the model, and then when that goes out of business, I can buy it for pennies on a dollar. Now I have this asset that there’s an opportunity. I wonder if there isn’t going to be that in commercial real estate in terms of office space. Our next topic is an interesting one. Listener, follow me along with this. This isn’t as relevant to someone who’s running an extreme early-stage startup. I know more than one founder who has hit the point where they’re doing (let’s say) $2–$10 million in ARR, they go to try to raise money, and they don’t want to go the venture unicorn track, but they do want to have some liquidity perhaps for themselves or to pump into the company to continue to grow. There’s a couple of things that tie into this. The bottom line is due to the regulations in the US, it’s virtually impossible to do that. It’s not worth it because of the high expense of going public in the US. First is in Canada, there’s the Toronto Stock Exchange and in Australia, there’s (I think) the Australian Stock Exchange; I forgot the name of it. In Toronto, if your company’s market cap is $4 million, you can go public on their exchange. The fees are between $10,000 and $200,000 depending on how much money you raise. It’s actually quite inexpensive. You could imagine a SaaS app, much like you would meet at MicroConf who’s doing $3, $4, $5 million a year going public. The phrase ‘going public’ has such gravitas with us. It’s like only GE, Apple, and Google are public, these are master companies, but I don’t think that should be the case, actually. Einar, you want to walk us through a little bit? We have a couple of topics to touch on here. One, why the hell is it so expensive and hard to go public in the US. And then, the real topic that leads us into is these things called SPACs which are Special Purpose Acquisition Companies and they’ve been in the news quite a bit lately. I’ve heard them on This Week in Startups and there’s a Forbes piece on them. They are suddenly becoming a popular way to go public in the US.
Einar: It is slightly strange. I think most US investors don’t really look abroad. They just think this is the way it’s become. The trend over the last 10–15 years has become that even though this (perhaps) does not have your regulations than they already were, you end up in a scenario where a company like Airbnb is going public after (maybe) 12 years of existence instead of the more typical which is a decade or plus ago with 4, 5, maybe 6 years. It is slightly weird to me that you have to be one of a small number of unicorns in order to go public. As you mentioned, that’s just not the case in other countries. There are dedicated exchanges like the TSX Venture Exchange in Canada. Being Norwegian, I know there’s one called […] in Norway. There’s a couple of ones in Germany. Basically, people understand that if you’re buying stock on this exchange, then yeah, there are some compliance and things, but these are much riskier bets than your GE, Google, Apple or things like that. On a philosophical level, I don’t really understand why that is impossible. Investors can go on the Robinhood app—like I did—and buy a bunch of put options on United thinking that Donald Trump is going to announce some sort of a vaccine before the elections so it’ll jump up. You can lose all your money as I did in a week. Nobody’s stopping you. There’s no accreditation process or doing that. The stock market is, as we in part of seeing through COVID, to a large degree is a good way to lose a lot of money very quickly. But fundamentally, I think one of these things should exist in the US where if you get a certain size, as you say, $5–$10 million in ARR, why not go public? Companies like that go public all the time abroad. It gives access to retail investors who don’t have access to private markets. Fundamentally, the fact that things take longer to go public means that the average investors who don’t have inside access don’t get to participate in the value creation there. I think I actually like SPACs—to circle back to the topic at hand. SPAC’s a sort of a symptom of this problem. SPACs are basically like empty shell companies that people put together and they go public. They list an empty company, the company basically says, we’re going to sell $500 million worth of stock in our company—in the shell company—and then turn around, use that capital to buy or acquire a private company. Effectively, it’s like a backward IPO almost. The company becomes a public company by virtue of being acquired by the shell company. My view is that that sort of a symptom of how complicated and how long it’s taking for all of these companies to go public. I think we’ll start to see more and more of that trend. I’m sort of pro at it. I don’t think there’s any reason why more companies shouldn’t be public so that more investors get access to the value creation that obviously happens there because you get to $10 million, as you say, what’s your option at this point? It’s to sell to private equity, to sell a portion to private equity for some liquidity and things. But are they really giving you the best price? Wouldn’t it be better to just sell 20% of your stock to the public and not have basically one boss who may have the wrong view of how you should grow and what your strategies should be going forward?
Rob: Yeah. I think SPACs are kind of a loophole or a workaround to what I would say an overly regulated, overly complicated system. I certainly think there need to be investor protections. Yes, most of the laws that are governing all of these were written in 1935. They haven’t really been updated. There was the jobs act that was a little bit for crowdfunding, but really, there are still a lot of problems with what’s going on today. Tracy, you’ve witnessed it first hand as we’ve been raising funds for TinySeed Fund II. Einar came back to us because he was doing research and he said, if you raise a venture fund, which is what TinySeed’s raising and you’re raising more than $10 million, the highest number of investors you can have in that fund, these are accredited investors who either have a million dollars or more in liquid net worth, not including their primary house or they have an income of $200,000 a year for the past two years or $300,000 if they are married. To put this, the definition of a sophisticated investor in the United States, even then, you can only have 99 of them in your fund. If you want to raise, for example, a $40 million fund, you need people to give you your minimum investment to be $400,000 per as average out to that, which is kind of crazy. Because if you could have a thousand investors, then you can drop your minimum way down and you could make it more accessible to so many more people. I think given our love of what we are doing and our belief in this space, that we would prefer for more people to be able to participate. But I’m curious, had you heard of this 99 investor problem before now and any other thoughts on it?
Tracy: This issue really goes back to me as someone who isn’t an investor, has always dreamed about becoming an investor, kind of a baby investor. Coming into TinySeed, I had no idea about what went into raising a fund and being a part of a fund. TinySeed’s thesis, which you put on our website—working here, I totally agree with it—we’re talking about TinySeed being an index fund into B2B SaaS. When you’re talking to people who can be a credit investor, that those require you have before but maybe just barely meet those requirements, a lot of people are very into the mission we’re doing, a lot of people don’t have $400,000, but they’re like, hey, this sounds like a winning bet to me. I love to put it in 5000. It sucks to be like, no, we can’t. We can only talk to the people who already have enough wealth that they can just blow this massive amount of money into TinySeed. It creates this problem between wealth equality in a way that people who are coming from disadvantaged backgrounds have a hard time getting to that level of wealth to be able to throw around that amount of money. When we have something like TinySeed—again, I totally believe in what we’re doing, think they were going to be a success—I want to help other investors, especially from disadvantaged backgrounds, also be a success with us and we have to constantly tell them no. It just drives me absolutely at the wall. The fact that the 99 investor problem exists—Brad Feld wrote a blog post about this if you Google for it—it’s frustrating. And because in 2018, President Trump signed (I think) the startup act or whatever, that was hoping to solve this problem between 99 investors being allowed to invest to be in a fund by opening it up to 250, if I recall. But that only applies to funds that raise less than $10 million, which is ridiculous, because the funds are raising more than $10 million and need to have more number of investors who are able to invest in it. I feel like it’s a huge issue. It leads to the restriction of wealth growth to these already wealthy people. It’s like I can go to a casino, I can spend $5000 in a casino, and no one would bat an eye. But I can’t take $5000 and try to invest it in some larger fund which, because they’re kind of indexing, arguably might have more chance to succeed that’s not allowed for me because those funds are restricted to only large investors. It’s just bananas.
Einar: I obviously agree. I talk to investors all the time and I tell them, I’m sorry, our minimums are minimums. People get frustrated and they’re like, you know, I want to put $50,000 into this. Often, they’re successful operators. They’re people who maybe bootstrap to SaaS business, got it to a million or two, sold it, and now they want to put some money into the area that they understand. In part to support the community and in part to obviously make a return. The crazy thing is, it’s already even worse than that because technically speaking, there are two definitions of investors. There’s more, but the main ones are the accredited, which is what you’re saying. Really, then you’re a pretty wealthy person if you qualify as an accredited investor. But there’s a higher threshold called a qualified purchaser. Basically, what a qualified purchaser is is somebody who has at least $5 million in investments. That’s obviously wealthier than someone who is “just an accredited investor.” But the funny thing is, that you can actually take off the 1999 qualified purchasers. What that means is, our minimums, and any fund’s minimums can be lower for the wealthier investor. Which doesn’t make any sense. I can take $5000 from you if you want to, but only if you’re worth at least $5 million. If you are “only worth $2 or $3 million,” well, I’m sorry, but then I have to take $400,000 or whatever the minimum for the fund size is. That doesn’t seem to make any sense to me. I don’t know that I’ve ever read a good reason why the limit is 99. I don’t understand why it should be like a thousand. You don’t want something that turns into a scam, then gets a million investors caught up in it, but 99 just seems really arbitrary.
Rob: If it was a million then it’d be a public company. If you had that many […] public. But you’re right, there’s a big difference between 99 and a million. We’ll see what happens. I’m just throwing my hands up and being like, somebody needs to figure this out because I do believe this is hurting innovation. Much like the high cost of healthcare in the United States, I think the regulation around going public and the regulation around 99 investor limits on funds, those three things are the things that I have experienced first hand over the past year or two, that are seriously impacting the startups that I’m working with. Not only with TinySeed, but just all around MicroConf and the people listening to Startups For The Rest Of Us. Hopefully, we can do something about it and I would be remiss if I did not recommend people go check out tinyseed.com/thesis. If you click through there, you can of course send Einar an email. You fill out a form and he gets an email, and you could chat with him to hear about the TinySeed thesis and to hear more about what we’re up to and how we’re raising that fund. Our last story of the day is from Reddit and it’s a warning about Glassdoor. The person says, “For the past few years, I’ve often defended Glassdoor as a useful resource, as part of any job seeker’s overall job-seeking toolkit. About a year-and-a-half ago, I interviewed with the company that had horrendous reviews.” This is a thousand […] summarized from here. In essence, there were a lot of negative reviews, the person took the job anyway, the job was not good, and the environment was toxic according to this poster. They wind up going back to Glassdoor and posting a negative review, that then not only got removed but every one of this person’s reviews on Glassdoor was removed. They implied at the end of their post that they’ve heard that Glassdoor has supposedly done a minor pivot into brand management so that perhaps it’s becoming less reliable than it’s trying to get rid of negative reviews or something to that effect. The question I have is maybe two-fold and we’ll start with you, Tracy. Glassdoor has tended to be a bit of a mixed bag, but I’ve used Glassdoor quite a bit for salary recommendations which I find to be pretty reliable. I also used it back when I looked at lead pages, Glassdoor as an example when we were talking about being acquired by them. There have been companies where I have tried to research whether I think they have a positive or a negative reputation with their employees. I have always wondered, much like Yelp and much like Amazon reviews, these things do get gamed eventually. I’ve always had in the back of my mind, I wonder how reliable these actually are. Do you have much experience with Glassdoor and what are your thoughts on this whole topic of can this be a game, do we think that as something gets big, eventually it just does lose its value because they can’t control the potential review spam?
Tracy: It’s just funny to me because I’ve never used Glassdoor other than for salary information like you mentioned. A previous company I worked for had Glassdoor reviews and they were terrible. It was the funniest thing to me. I believe one of the large reasons why they completely renamed and rebranded the company was because their Glassdoor reviews were so terrible and they needed to have some way to wipe the slate clean. This was about seven or so years ago. There are probably a lot more systems to game it now. But back then, you just had to wipe the slate clean in order to get rid of those past reviews. I have checked them recently and they have better reviews before. I assume that they made some management changes in addition to rebranding the company. It’s definitely been games in the past in a very complicated matter like that. I absolutely think it’s being games now. I read that article, that Reddit post they are mentioning. It’s just like Yelp. All these companies are going to be very concerned about their reviews because it’s going to vastly affect the quality of the employees they get. Savvy employees are going to leave bad reviews and they’re going to stay away. Now, these companies are going to be doing whatever they can to either with Glassdoor or otherwise to scrub those reviews just like Yelp. I think what’s going to happen, just like Yelp, I think people are going to use it less now that these things are coming more in the forefront. But I’m curious to hear what you two say about this.
Rob: I’m wondering if this does open up the door, the opportunity for a new Glassdoor competitor to come in and have a better algorithm from the start or some other way of validating this stuff that then becomes reliable for a few years and then the same thing happens. Einar, do you have thoughts or experiences with Glassdoor?
Einar: I don’t have much experience specifically with Glassdoor. But I do think in general, anonymous reviews of things, I think it’s prone to gaming in general. I think you’re right. I think there’s probably a way to make Glassdoor not so easily gameable, but it doesn’t surprise me at all that companies will want to try to do it. Like I said, one of the hardest things—recession talk aside—is to get people to want to work for you, to get quality people to do, and if you have a horrendous review on Glassdoor that says this is the worst place in the world to work, that’s going to be a problem. I think in general. As I said, it’s a little bit like Yelp reviews. Do you really know or is it somebody who has a real aversion to creamer in their coffee and this particular way that this café does it and decides to make it their mission to take this café down? That’s hard to know.
Rob: Yeah. Obviously, if you listen to this, you’re probably at a pretty early stage. Maybe 0 employees, maybe 10 or 20 employees, I do think at least for now that people will go to Glassdoor. If you have no profile, that’s probably fine, because you just say, we’re so early that we don’t have one. The danger is, if you don’t have a profile, someone leaves a negative review, and your only review is negative. I would consider having some type of presence on Glassdoor if you are going to be doing the hiring and you do have at least a couple of employees. You can ask folks, hey, can you just post an honest review of your experience here? I don’t know that this needs too much more commentary or thought, but I do think that’s the problem of these big reviews, especially anonymous reviews. That’s the thing. Yelp, you can effectively be anonymous. You could, over time, can buy accounts on Yelp that have already great reviews. You could set up a new one, leave a bunch of positive reviews, and leave negatives. There are ways you can do that and these things just tend to be really hard if it’s not tied to some identity.
Tracy: As I say, being a Yelp Elite in the early days of Yelp was pretty sweet in the Bay Area. I say as a former Yelp Elite.
Einar: Wait, what’s a Yelp Elite?
Rob: Oh man, you are not in the know.
Tracy: I know right? I was like, how do you not know this? They have this whole program that if you’d left enough reviews—if I recall correctly— you’ll be invited into the special Yelp Elite program and then you will get invitations to restaurant openings and special events. The idea is that they will give a bunch of free food and alcohol and give positive reviews afterward. There was this one summer—quite a while ago for me, like 10 years ago for me—where pretty much every weekend I was drinking for free based on being Yelp Elite.
Einar: What? Oh my God.
Rob: You’re famous. Tracy Osborn, you are @tracymakes on Twitter, and Einar you are @einarvollset. We will link both of those up in the show notes. Einar, thanks so much for joining me again on Startups For The Rest Of Us.
Einar: Thanks for having me.
Rob: And Tracy, thanks for coming on.
Tracy: Happy to be here.
Rob: I really appreciate Tracy and Einar taking the time to record this with me. I hope you enjoyed this episode format. I’ve done just a handful of them over the past several months. If you really enjoy this type of format, please write in questions@startupsfortherestofus.com or hit me up at Twitter @robwalling and let me know what you think. If you think they could be improved or if you just love to hear them more often. I’ve only done them maybe once a quarter, both due to the lack of new stories that are maybe discussion-worthy in our community, but also, they’re a little more effort to set up. But I am willing to do that if I hear resounding yes, yes, yes, this is something that I’d really love to hear. Thanks again for joining me this week and I’ll be in your earbuds again next Tuesday morning.
TinySeed Tales S2E8 | Upmarket Starts to Pay Off
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Brian & Scottie Elliott are the husband & wife co-founders of Gather, an interior design project management app.
Last time we spoke, they were bouncing back from the initial shock of the COVID-19 crisis with the potential to sign two large enterprise deals that could help them out with an ongoing cash crunch.
In this episode, Rob talks with them about customer-funded development, always following up when doing outbound sales, and restarting a productized service.
The topics we cover
[01:14] Status on large enterprise deals
- One closed, one did not.
- The first touch with them was almost a year.
- They had a software proprietary software that they built internally and have been actively seeking a new tool
- Custom data migration and storage and it was also a bunch of custom development
- Win-win they got what they wanted and we got some new cool features
- Big win, I would say, to get paid, to build a feature that you expect other customers to be able to use.
- Optimistic that maybe we can sort of like build the product that we want by closing these sorts of deals and move into the hospitality world
- Referred to as customer-funded development
[06:51] Obstacles remain for moving upmarket
- Outbound is not going as well as it used to.
- Inbound has been fine. It’s a little down this month over the previous.
- Always be following up.
- Never letting go until you’re explicitly told to go away.
- Making sure you never lose track of someone is like a huge win.
[10:03] Moving past uncertainty
- There is still uncertainty. I think there’s always that whether there’s a pandemic or not. When you’re first getting started and plugging along, there’s always that kind of like tension, wondering how this month is going to be.
- We have plenty of signals that people are willing to pay us quite a bit more than they were paying us.
- When we started there, we were charging $29 or $39 a month, which in retrospect is just, you know, terrifying that we were priced that low.
- If we can get to that traction where, you know, we are selling 10 new customers per month at the price points that we’re doing right now like it’s a game-changer.
[13:49] Restarting a services venture
- Brian and Scotty decided to dip their toes into the world of services with a virtual coordinator that would complement their software.
- The idea was to bring in some high-value clients and make some extra cash. And although they had to shelve it due to the COVID crisis, there’s been some renewed interest.
- Initially, we thought of the services side as a way to get some revenue fast.
- This is pretty high touch services but finding a team to help with the services side. And then of course we’d be using the software. To also manage the services, which could potentially drive some of the features that we build for the software.
- The most important piece and that is going to be the process of setting up SOP and figuring out how I can best. Manage the services side.
[19:23] Last week of TinySeed Tales
- So much knowledge gained and relationships built. It was a great year.
- I think not being able to meet in person in the year together feels like it’s still, like, there’s no closure.
- It does feel just sort of finished, not finished.
Links from the show
- Gather | Website
- Brian Elliott | Twitter
Thanks for listening to another episode of TinySeed Tales. If you haven’t already, be sure to check out Season 1 of TinySeed Tales where we follow the Saas journey with Craig Hewitt of Castos.
Episode 520 | Why a Million Dollar Agency Quit It All and Moved to SaaS
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In this episode, Rob talks with the founder of SegMetrics, Keith Perhac. SegMetrics is a SaaS product that helps users get clarity on where their leads come from, how they act, and how much their marketing is worth.
We dive into the difference between SegMetrics and other options for attributing sales and revenue to traffic channels.
We also go through Keith’s background and learn about why he shut down his million-dollar marketing agency to double down on his SaaS.
The topics we cover
[04:28] Where does SegMetrics fit within the analytics and attribute market?
[09:35] Why build a SaaS when you are running a 7 figure agency
[12:56] Dealing with a growth plateau
[21:28] Shifting focus to work on SegMetrics full-time
[28:05] Frugality as a bootstrapper (and how it can backfire)
Links from the show
- SegMetrics | Twitter
- SegMetrics | Website
- Keith Perhac | Twitter
If you enjoyed this episode, let us know by clicking the link and sharing what you learned.
Click here to share your number one takeaway from the episode.
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
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Rob: Welcome to this week’s episode of Startups For The Rest Of Us. This is episode 520 in which I have a lovely conversation with Keith Perhac, the founder of SegMetrics. SegMetrics allows you to get 100% clarity on where your leads come from, how they act, and how much your marketing is really worth. We dive into exactly the difference between SegMetrics and other options for attributing sales and revenue to traffic channels, advertising channels, and all that.
We’ll go through Keith’s background. You may have heard of him. He’s done at least one MicroConf attendee talk. He’s done a MicoConf mainstage talk. He used to host a podcast with Pat. Keith and I cover some really interesting ground today as he talks about why he shut down his million dollar marketing agency to build and double down on his SaaS.
Before we dive into that, I wanted to ask you a favor. If you’ve been listening to the TinySeed Tales episodes that are coming out on Thursday mornings, you have heard through episode seven that came out last week, there are two episodes left. Obviously, this Thursday and next Thursday. I’m curious to get your feedback on season two and frankly, just the whole concept of TinySeed Tales. Feel free to email me directly at questions@startupsfortherestofus.com. You can DM me on Twitter or you can mention me at @robwalling on Twitter.
Given the amount of time and money that they cost to produce, I’m curious to hear if you like the storytelling approach. Obviously, it’s a more produced form than really exists in our space. I enjoy doing them but I also want to make sure that they’re providing some type of value to you; whether it’s entertainment, motivation, inspiration, tactics—just anything that you’re getting out of it. I would appreciate hearing from you. Drop me a line and let me know what you think.
With that, let’s dive right into our conversation. Keith Perhac, thank you so much for joining me on the show today.
Keith: Thanks so much for having me, Rob.
Rob: Today, we’re here to talk about why a multi-million dollar agency owner decided to quit it all and move to SaaS. It’s a great topic.
Keith: It is. It sounds a lot more impressive when you say it.
Rob: Why in the world would you do that, sir? Now, we’re going to dig into that today. Just so folks have some context, you’re a software developer turned marketer—the dangerous combination. I love that combination whether it’s a marketer who learns how to code or a developer who learns how to market.
Keith: It’s like a superpower.
Rob: It really, really is. I don’t think people understand that enough. A lot of us developers, you do it for five years, you do it for seven years. You become senior and you’re like, man, I can do a lot of things. Then, you start over with marketing and it’s a grind. You don’t know any of it, you think it’s fluff. You get three, four, or five years into that and you pile those two on, it’s ridiculous. It’s like an epic, highlevel, multiclass in Dungeons and Dragons.
Keith: Yeah. Just to be able to understand how the internet and all that technology works makes you such a better marketer. People come to us and they’re like, why aren’t these things tracking right? Because you have no idea of how the internet works, why the scripts aren’t firing, and how URLs even work.
Once you understand that, it’s a superpower to get everything. That’s not even touching the automation you can do, it’s crazy.
Rob: Yeah. You were running a seven figure marketing agency. It was called Develop Your Marketing, focused on conversion rate optimization and building out funnels. You had marquee clients, big name clients folks I’ve likely heard of like Ramit Sethi and Eben Pagan.
You decided to build a SaaS on the side. I think you were using the same resources. You were kind of using the agency team to start building that out. That SaaS is called SegMetrics, segmetrics.io. I’m going to read a little bit about it so folks have a context of what you build, then we’re going to go back and kind of talk through your decision to build it, the highs and lows, the launching—just the whole story so folks can both be inspired by it and also feel the agony and the pain of what you felt in the early days. As well as takeaway some actionable stuff. Obviously, your story as a marketer and a developer, I think there’s going to be a lot of folks that can takeaway.
SegMetrics, your h1 is, “Get clarity on your true lead value in every step of the way.” The subtitle there is, “Get 100% clarity on where your leads come from, how they act, and how much your marketing is really worth. Get a handle on the Key Performance Indicators that matter most for your marketing funnels. Built by marketers, for marketers.”
When I think of analytics or attribution, I think of, okay, I have Google Analytics as this anonymous analytics and aggregated. I have a Mixpanel. There’s obviously those types of competitors for individual funnels and people walking through. Of course, I have Facebook Pixels, Google Pixels, and other things for conversions and dollar amounts. I think Mixpanel does that too. Where does SegMetrics fit into that mix?
Keith: The idea is kind of similar to Mixpanel in a way, which is we want to be able to see everything that anyone does in a customer journey. From what ad they landed on to how many times they viewed a page, to if they attended a webinar, to be able to understand who are the most valuable people who are going through your marketing funnel.
The problem with Mixpanel is that it has no native integration. It has no idea of revenue out of the box. It has a garbage in and garbage out problem. Unless you were really diligent about what data you’re sending into Mixpanel, you’re not going to get anything valuable out of it.
What SegMetrics does is we take that idea of like, okay, we want to see every event in an entire customer journey. Marketers are never going to be able to hook this up. What we need to do is integrate directly with all these tools to pull the data out of Google Analytics, out of Google Ads, Facebook Ads, your ESP, your CRM, your Stripe, your payment gateways—everything—and create an individual persona that we can then say this is this person from all this different sources brought together. This is their full customer journey.
Then, what we’re able to do is say, all right, we know that Facebook Ads, our lead value is $50 for each lead we bring in from Facebook. Within that, do we have actions that make people worth more money? Worth less money? Are there certain demographics that can make people more valuable? Is this idea of finding these segments of actions, or demographics, or people that are more valuable so you can then go after them more, be able to market to them better, and understand your audience better.
Rob: Yeah. That makes a lot of sense. It was certainly an issue that I’ve had marketing SaaS, as we were doing ad spend or even getting organic traffic of I had this aggregate numbers of, hey, this is what our churn is, for example. I couldn’t slice it based on demographics or oftentimes, even based on source unless I really have to finagle some stuff.
Keith: That’s why we built it. As a conversion rate optimization agency, that’s what we’re doing. We exported all of this data from all these tools, created a bunch of pivot tables. Five hours later, we had information.
Rob: Yeah. Inside SegMetrics, you can slice and dice it. You could look at churn. You could look at lifetime value based on all this stuff, right?
Keith: Exactly.
Rob: Okay, for me that paints a crystal clear picture. I think most SaaS founders who’ve gotten this far, who are doing $5000 or $10,000 a month or more, are trying to attribute stuff, know the limitations of having to build it custom.
We may have already answered my first question, then. My first question is why build a SaaS company if you’re running a seven figure agency? It’s obvious that over and over and over, you probably have to cobble this together with duct tape and baling wire.
Keith: Yeah. Essentially, we were working with an analytics agency—a friend—who did a lot of our analytics. We had a lot of our analytics done inhouse. We just spend so much time on it. We were spending probably 20%, 30%, of our week just pulling the numbers. That doesn’t even mean the analysis of what they’re doing but just pulling these numbers.
Okay, we have this webinar. What is the lead value of someone who attended the webinar? We pull all that data from whatever system we have then we pull it from all the tags. Then, we pull the revenue. Then, we match them together. Awesome. Then, we write up the report, the PDF, and everything. We take it to the client and they’re like, what about the people who came from organic versus paid? What’s that breakdown look like? I’m like, give us five more hours. We got to go through that whole thing all over again with these new things.
The analytics guy we were talking to and the guy on my team, we were talking about this, and he’s like, it’s just a database. It’s just a spreadsheet. Why can we not just slurp this data in and do this automatically? That’s where it kind of starts. Okay, could we do this? Could we scratch our own itch? Yeah, that’s where it kind of started from.
Rob: Today, you are a team of 10. As you said offline, “Growing very quickly.” Of course, I have your revenue graph here. You’re in batch two of TinySeed, I have access to your numbers. I will confirm that. Doing very well. In fact, your growth has accelerated. It really looks like at April, May, it starts kicking up which coincidentally—
Keith: I wonder what happened in April and May of this year? I have no idea.
Rob: I have no idea. Don’t think batch two started. We’ll get into that later on the interview. I want to do something chronological. You started working on this five years ago, back in 2015. You told me that you built it in two weeks, 2-3 weeks. That you had a customer the first week of launch. That sounds amazing. That is crazy, crazy fast—to build this whole that fast. Second, to get your first customer the first week of launch. Both of those things, how did those happen?
Keith: This is actually the second SaaS I built. The first one was Summit Evergreen which was a membership site platform for marketers. We had made some mistakes that time. We thought we knew what the customers wanted based on the consulting we have done. We built a very large, very complicated app that had a lot of features that turned out no one actually needed. It took us many months to get to market. Once we got to market, it was slow to get people in. It was very difficult.
With this, we built it to scratch our own itch. At the same time, we’re like, this is something that everyone needs. We’re not going to make the same mistake. What we did was we did a very hands-on, iterative process with our customers. We picked two or three customers—clients—that we were working with. We said, hey, we’re building this thing. Here’s the numbers that were looking to get this value. They would respond. We would say, awesome.
We did a raw dump of their data. We plugged in the engine. There’s no UI. There’s nothing at this point. There’s just me doing some math in a PHP file on the backend based off of the CSV. We get that in and we spit that out. We show it to the clients and we say, hey, for this webinar you just ran last week, this is the lead value. They’re like, oh my god, this is amazing. We’re like, okay, this probably has space.
Then, the team had a little bit of downtime. I think this was early February or late January. Right after a big launch. We knew we had two weeks of almost no client work. We decided, let’s put a challenge to ourselves. Let’s get the team together and we’re going to work on this fulltime for two weeks. We’re not going to do any client work because we don’t have much scheduled. We’re going to see how much of this we can build.
In two weeks, we pretty much had version one done. The engine was already built but the UI, the signup, everything around it, the creation of the reports, the spitting out the reports, the graphs, the everything we built around two weeks. Finally, we launched and it was the product of the day when we launched. Super excited about that.
Then, I found out that there was a space in our Stripe public key when I copy-pasted it into the site, no one was able to purchase. That was rough. It didn’t deter us. I think within a month, we were up to $1000 MRR.
Rob: Wow, that’s great. A lot of learnings from that. I think people think of an MVP as a limited version of a product. You really tripled down on that definition.
Keith: It was a text file. I actually have screenshots of me and Slack. Or not Slack, it was Skype. I just had a text file with six lines. I copy-pasted that. Again, is this valuable? I’m like, yes. That was it.
Rob: Yeah. I love that approach. I often talk about, in my first book, human automation of having VAs just do something on the backends and spit out a report. That’s really, in essence, kind of what you did there.
First customer in the first week of launch, you obviously solve a problem. 1000 MRR in the first month; were you getting those leads from clients, or were you actually doing marketing?
Keith: I don’t remember, to be honest. I know we had two clients that had decided to sign up as customers. A number of our clients we kept as just kind of free users. They weren’t interested in the numbers, but we needed it for our work so we did it internally. Then, the rest were people who found us either through Product Hunt or promotions that we did, tweets. That was five years ago. I don’t really remember who they were and where they came from.
Rob: Right. You mentioned to me as we were talking before the interview that you were at about $1000 MRR after the first six months. Is that right? Did growth plateau that much?
Keith: Yes. We didn’t hit $2000 until August of 2016.
Rob: That was more than a year later, because this was early 2015. What happened then? You basically rocketed to $1000 MRR, you solved the problem that people are obviously in a dire pain point. You flatlined, in essence, for a year. What happened there?
Keith: More than a year. More than a year, Rob.
Rob: You remember every minute of that. 15 months.
Keith: What happened was I had a day job. Not a day job like I was working for someone else, but we had the agency. The agency is pulling, like you said, $1 million+ a year. It’s really hard to take the team off of client work and put them on something that’s making $1000. We didn’t have any customers or any clients that paid us $1000, just $1000. That was inconceivable. I think our lowest contract was $10,000 a month.
It was very difficult for us to put the time into it. I think we language there—I’m looking at the graph—until mid-2018. Wow, you can actually see the spike. Mid-2018, I had decided that we were going to focus on SegMetrics. We always said, hey, we’re always the bride’s maid, never the bride. We’re helping our clients run these million dollar launches—multi-million dollar launches. We’re making good money but we want something that we control in our product, in our stuff. We had always thought this. We had SegMetrics there but we haven’t put any love and any energy into it.
That summer, I remember, I spent some time. We rewrote the UI. I said, we’re going to focus on this. Over the next six months, we’re going to transition out of consulting work, out of the agency work, and we’re going to start moving towards SegMetrics and something that we own.
I know it’s going to be slow because we make a lot from the agency and we need to wind that down slowly. That’s our goal. I was just so tired. I think the team was just tired of having this great resource that no one was using. We didn’t spend the time to make it worth it, to put it out there.
Rob: I remember having that same issue before I went full time in products. I was consulting. I had, basically, a micro-agency where it was either me or a few contractors that I markedup and billed out. It was software development. I remember billling $125 an hour, $150 an hour, somewhere in that range, for every hour. I was booked more than full time. 40+ hours a week I could work. I had these products on the side that were doing exactly that. I had a beach towel website that was doing $1000 a month. Net profit was $150 a month. I had DotNetInvoice which was doing a couple of grand a month, most of that profit.
When you compare those numbers, it’s like, I can make a couple grand in two days of work. It was such a struggle. I heard people call it an addiction. The cash agency work or consulting is this cash addiction. It’s amazing when you want to get to full time income or higher quickly but it’s really hard to move away from. As you said, the focus is constantly towards your high value, instant cash infusion, which of course, is working for clients.
It sounds like you got tired of it. You got fed up with it and you wanted to double down on something that you have built. You fired your whole team in order to do this in late December 2018. That must have been brutal.
Keith: It was rough. It was honestly rough. It wasn’t, hey, I decided to work on SegMetrics and I’m letting everyone go. The original plan was to bring everyone over and we’re going to slowly shift over. The team’s going to stay. There were a number of issues with that.
One of them was that same mental model that the company has of, hey, I can do work for clients and make a lot of money. Or, I can spend time and make no money with the SaaS, was also there with the employees, with my team. We actually had a number of conversations over six months. Essentially, what it came down to is, it was too hard of a mental shift to go from the client is asking something right now. I could spend an hour on that and the company makes X hundred dollars. Or, I can spend six hours working on SegMetrics and the company makes… There’s not a one-to-one translation.
At this point, I think we had done the agency for six years. Eight years, maybe? That was the challenge. We have an hour for dollar, time for money exchange with our clients right now. We do not have that for SegMetrics. We have time for literally nothing exchange. It was very hard for not only myself, but my team to prioritize that.
There are also other issues like when you only have less than 100 customers, you don’t need an account manager. Where do we take the account manager? We kept trying to find roles that didn’t fit for people. It was just very difficult. What I ended up doing at the end of 2018 was saying, hey, guys. You guys are incharge of SegMetrics. You guys work on SegMetrics. I’m going to handle all the client stuff so it gets it all of your plate.
The mistake I made was thinking that they understood SegMetrics as well as I do. I’ve been living it for a year at that point, mentally. Trying to think of, what are we doing next? What are we doing next? It was a mistake on my part. It was just a shift that couldn’t happen.
What happened in January, I said, guys, we can’t do this anymore. I helped find them new work, introduce them to clients. Honestly, it was heartbreaking. I worked with these guys for 6-7 years. It’s really rough. The good side of it—kind of the windside of it—is that because SegMetrics has been growing and because there’s very little of the agency side left, I’ve actually brought them back on in the last few months. I’ve brought the team back together and they’re now working in roles that I think run to their strength instead of the things I was trying to force them into, which is really wonderful. I love working with them and I’m glad that they’re back on the team.
Rob: That’s such a cool ending to that story. When you’re in the midst of that, it probably feels devastating. Yet, to circle back two years later and be like, hey, we have a product now that can afford all of us, that makes the salaries. It’s an incredible story. That’s cool.
As you’ve contacted people, I’m assuming you’re bringing them on one at a time, you email them like, hey, want to come back and work on SegMetrics? Are they stoked? Are they over the moon to do it?
Keith: I don’t know. Yes, they were. I was always very nervous about the whole thing because I let them go. I felt like I had failed them, in some way. It was very nerve-racking for me to reachout, to talk about that, and bring them back on. We had talked in the interim. It’s not like I had cut them out of my life completely. I hope there’s no ill will. I enjoy having them back on. Mentally and emotionally, it was a very rough time, I guess.
Rob: I imagine, it seems to me, if I were in your shoes, it would almost be a mix. You have to let these folks go, even working with them. At the same time, once that’s done, you were then full time on SegMetrics—focused, right? By January of 2019, this was a month or two later, you were, essentially, for the first time since you launched it, you’re all in on it. That had to feel good.
Keith: It felt good. It felt very good. It did come with some challenges, though. When there’s other people around, there’s blame to go around. I see this a lot with my family as well. It’s like, it’s noisy here, I can’t concentrate. Or, the kids kept me up last night. I can’t get my work done.
Then, when it’s just you, all those excuses go out the window. You’re like, crap. The reason I’m not being productive, the reason I’m not focusing on what I should be doing is not some external force on me. It’s because I’m an […]. I need to get in gear, get my mental state insync so that I can do my work, and focus on the things that are important.
Rob: Yeah, that’s such an interesting thing. You mentioned to me offline that your family actually left for six weeks and you weren’t able to go with them. They went to Japan, where you guys used to live. You were left alone at the house. Probably, your inner monologue is, finally, all the interruptions are going to stop. It’s going to be so quiet. I’m going to get so much done. That’s not what happened.
Keith: No. The first two days were great. After that, I just had to start wrestling with my own existence at that point. I’m like, why am I not being productive? I remember back when I was younger, I could pull those 14 hour days, it was great and I felt energized by that. Now, I’m almost 40, I’m going to be 40 this year. I don’t have that same energy. There’s a lot of mental stuff that went around that. I had to understand what are the things that make me productive, what are the things that don’t make me productive, and how can I get rid of the things that don’t make me productive.
Rob: Yeah. There’s so much about learning your own psychology, managing that, and learning yourself. Same thing for me, when I was in my 20s, I could do 12 hours a day plus, sometimes, 14 hours a day. That was the point where Sherry went to Africa for a month, I believe. During that time, I would come home from the day job and then I would kick on a season of Friends. I make dinner, just sit on the couch, and code. I was coding side projects. This was 18 years ago or something.
Man, I got so much done. I would basically work from 5-6 at night until 1 or 2 in the morning. I’d get up the next day and go to the day job. It was kind of exhilarating because I was building my own thing. Within a month, she came back and I had launched a product. I believe that was FeedChat, it was a really early one that I did that crashed and burned.
During that time, she came back and I started talking about Ross and Rachel as if they were my friends. I was like, oh, yeah, Ross was saying… She was like, you know they’re not real, right? You know that they’re not real people, right? That’s always been a funny joke.
It’s learning about your own psychology. Obviously, in my 30s and now early 40s, you have to know more about yourself, I think. Atleast, I have to learn more about myself, my ability to make myself focused, and make myself get stuff done. It sounds like you’ve gone through the same thing.
At the beginning of 2020, eight or nine months ago, you hired a project manager to manage you—to basically bust your chops. Tell me about that. It’s pretty smart. I know some people get executive coaches or business coaches who they meet once a week or twice a month or something. You hired someone who’s more in the business and almost they’re like driving tasks. They’re keeping you accountable.
Keith: Yeah. Even before I really had the team back, we were creating quarterly goals. We were creating, okay, this is what we’re going to be working on this month. It gave me two things. One, it kept me on task. If I went off rails too many times, sure, you’ve got something come up with whatever, she kept me on. Like, hey, if you don’t start on this stuff, we’re not going to finish it by the end of the month. We’re not going to finish it by the end of the quarter. Usually, the things that you said were important.
That was one thing that was highly valuable to me because I default the coding. I don’t default to launching or to marketing or to any of that. I default to sitting and building out new features because that’s what I enjoy doing. That’s not going to move the product. She was very good at keeping me on what needed to be done for the business.
The second part of that, which I thought was just as valuable, was that at the end of the month or at the end of the quarter, she’s like, here’s all the things you got done. It was mind blowing. I’m one of those people who no matter how much I get done, it never shows that I got anything done. I feel like I’m constantly busy but I’m not getting enough done in the time. To have her come and we go back over the last month or the last quarter and say, we got 80% of the key tasks you said that you’re going to get done. You got all these other small things that came up during the month that, maybe, didn’t get done. The key things you said needed to get done this month, got done. That was amazing. It was empowering to me.
Rob: Yeah. The accountability alone—to end that, it’s knowing yourself, right? Some folks I know, they can go to the gym, they want to do it on their own, or they get equipment at home and want to workout in their own garage and prefer not to be in the social setting. Other folks want a trainer so that they have to show up this many days a week and get their chops busted. I think that’s kind of a cool hack. Again, I’ve heard other folks hiring CEOs, coaches, or executive coaches but this was a little different take on that. I thought it was interesting.
Keith: It was actually Ramit Sethi who hired someone off Craigslist to slap him each time that he looked at Reddit or anything like that.
Rob: Oh, geez.
Keith: He did a whole blogpost about this. Essentially, he hired someone to sit next to him. Everytime he goofed off, looked at Facebook or something, she just slapped him.
Rob: That’s like a reality TV stunt.
Keith: That’s the value that having my project manager gives me. She’s not physically slapping me but that’s the value that I’m getting out of it. Like, hey, stay on task. You’ve got stuff to do.
Rob: Right. It sounds like you’ve kind of hacked your own psychology a bit with this project manager and fixed that weakness, I guess, for now. Switching gears a little bit, you talked about—I saw it in the TinySeed Slack—that one of the low points of your year was earlier this year. It was a technical snafoo with the database. I’m going to make you relive this. We’ve all been there, you’ve just got to tell the story, man. It’s going to be painful. Do it once. We’ll get it on tape.
Keith: Databases, they are my kryptonite, I guess. What happened was that there’s something in Maestro 57 or whatever you’re using that made the database fillup in about an hour. We went from 30% full to completely full in an hour. Of course, if it’s full, it’s not going to write new data. We’re f-up there. Trying to figure this out, freaking out, and there’s no way to compact it down. I think it’s like a 12-year bug in mySQL.
I finally gave up and said, okay, we’re just going to export the database, create a brand new one, and do it over. We did it. All right, we’re safe. Cool. Two weeks later, the exact same thing happened. This has taken a week of my life at this point. Just to migrate this thing, do it, and make sure everything’s done in this whole thing. Then, we have to do it again. I finally say, I can’t do this anymore.
We moved to a managed hosted solution through DigitalOcean who’s our providers. They have a hosted database setup. We migrate everything over there. Finally, we’re good. All the tests were perfect.
I go to sleep. I wake up to my phone buzzing again. I’m like, oh my god, what now? Apparently, there are some setting differences between how they have it setup and normal mySQL that was causing a bunch of imports to fail. All of our tests ran. I think it was four weeks or maybe six weeks of just screaming constantly about this database issue, throughput issues, and speed issues. It’s just miserable. Just absolutely miserable.
I don’t know what people are supposed to take out of this because it was just painful. The thing that I took out of this was that the reason I was running the local database in the first place, not to manage one, is because it was a fourth of the cost. I was like, I can do this better, I can have it customized, and I’m going to be paying a lot less. That was great until the database exploded. Then, exploded again. I lost 4-6 weeks of productivity because I didn’t want to pay, I don’t know how much. Maybe $100, $300, $200, extra per month for managed solutions.
Rob: Man, as a bootstrap, I would have done the same thing. It can be obvious, in retrospect, like, oh, I just paid a few hundred dollars because it made sense. There’s so many decisions you have to make as you’re growing. You can’t always do the Mercedes.
Keith: You can’t throw money at all. There’s just too many.
Rob: That was a big difference once we sold Drip to Leadpages. You could just throw money at it. They had raised $38 million in venture. I remember having strategic conversations with the senior leadership. I’d be like, man, that’s going to be tough. They’re like, what is the requirement? I’m like, we can just throw a bunch of servers at it. It’s going to be expensive. How expensive? For this event, $5000. Then, they laughed. I was like, bro, this is not even worth the conversation. We just wasted that much in dollars.
It was a nice luxury of having. Obviously, we weren’t flipping with money. You shouldn’t be and all that stuff. Frugality has its own reward. In the sense of having your database managed, I think there’s a lot of value there if you can swing it.
Keith: Yeah. It’s the core things of your business. If this goes down, what is the impact to the business? What’s the chance of it going down if someone else is managing it versus yourself? I don’t think doing a managed server from the beginning was the right move. Once we started having issues, we should have really looked at it instead of trying to do multiple migrations to other self-hosted stuff.
Rob: Yeah, I think that makes sense. As we transition to closing, as we’re getting to time, I did want to dig in, we teased it at the top of the show that your growth has really accelerated since April of this year. Just over the past five months, there’s a real noticeable uptick in your revenue graph. Of course, I’d attribute that to you starting TinySeed. I am curious, what have you done differently? Obviously, in TinySeed, one of the earliest things to talk about is pricing. A lot of the SaaS founders just don’t have pricing dialed in with the value metrics, whether it’s too low. You tweaked with your pricing. I’m curious if that had an impact or what else?
Keith: I think that there were two main events in SegMetrics’ five-year life that moved the needle. One was focusing on it full time. There’s a big jump in revenue starting when I decided to focus on it. The second one was TinySeed. The jump for TinySeed was much bigger than the first one.
The way we changed pricing, I think, had a lot to do with it. What we had originally with our pricing model was essentially large buckets. You were in the starter bucket until you hit 50,000 contacts. As soon as you had 50,001, you had to pay $100 extra. It was difficult because people try to keep their contacts low. People would always email us. Like, hey, I’m only one over. Can I have it cheaper for now? I was like, yeah, sure. Fine. Just one.
People, they upgrade processes with manuals. There’s always stress around it. It’s this whole thing. The pricing is actually pretty similar. I think for the majority of people, they’re paying around the same amount. What we changed was that pricing is now increasing based on the number of contacts you have but only $5 at a time.
The big difference is now not that you are going to hit a wall and suddenly be paying twice as much. It’s like boiling a frog, you’re slowly going up as you get more profitable. As you succeed in your business, you’re going to pay us just a little bit more. That, I think, has made it much easier for people to do that upgrade because people don’t really care about the extra $5 a month. They do care as soon as they hit that threshold of, okay, now, your bill has doubled.
Rob: That’s the thing with pricing. You didn’t really change your pricing. You kind of changed how it auto adjusts. That’s one of these things that is a challenge to foresee if it’s going to make a difference. I think there’s a lesson folks can takeaway. If you do have these big gaps, maybe have smaller tires in between the published tiers. We did this as well with Drip back in the day, where we would go based on subscriber count and have it go up every 1000 subscribers or every 2000 subscribers versus every 10 or 20, like we originally did. It did make a difference for us.
It’s almost closer to metered pricing. True metered would be like $0.5 per subscriber. For you, it would be absolutely per contact. You’re not doing that. It’s still in small tiers but I do think that there’s value in thinking about that.
Keith: Yeah. The other part of it, I think that’s the biggest one. Also, just deciding what integrations, kind of the Zapier model of, okay, if you’re using HubSpot, you’re not going to be a hobby user. Your base price is going to be higher. You have to start out in a higher tier if you are higher level. They require more support, they require more effort. We’re dealing with bigger companies. That, I think, also helped a lot. Before, it was just contact-based. Now, it’s contact plus features.
Rob: Sir, thanks again for joining me on the show. If folks want to keep up with SegMetrics on Twitter, it’s @segmetrics. Obviously, segmetrics.io. You, let me see if I can pronounce it right this time. Is it harisenbon?
Keith: That’s close enough.
Rob: How would you pronounce your Twitter handle?
Keith: Ha-ri-sen-bon.
Rob: Harisenbon, @harisenbon79. We’ll link it up because it’s kind of hard to spell.
Keith: I’m so bad at naming. I can’t believe I ever got into programming. It’s really what it comes down to.
Rob: The two hardest problems in programming are naming cache invalidation and off by one errors. Yeah. You’ve heard me tell that on MicroConf.
Keith: I love that joke.
Rob: Sir, thanks again for joining me on the show. I hope you had fun today.
Keith: I did, Rob. Thanks so much for having me.
Rob: Absolutely. Thank you so much for joining me today. I hope you enjoyed my conversation with Keith Perhac. If you have not headed to startupsfortherestofus.com and entered your email address to receive the two exclusive episodes and PDF guides, I would encourage you to do that. The first one is called 8 Things You Must Know When Launching Your SaaS. Second is 10 Things You Should Know As You Scale Your SaaS. These are two podcast episodes. They’re Rob solo adventures where I run through 8 things and 10 things respectively, that I think you should know as you launch, then as you scale a SaaS app. These are things that I have not released on the podcast. They’re not on my blog and really not available anywhere else.
Check it out, startupsfortherestofus.com. You can checkout the right message popup in the lower right or really go to any page and opt-in the right handside to join thousands of other startup founders who are bootstrapping and mostly bootstrapping ambitious SaaS apps.
That’s it for this week. I will talk to you again on Thursday morning on TinySeed Tales season two, episode eight. I will be here in your earbuds again, next Tuesday morning.
We’ll go through Keith’s background. You may have heard of him. He’s done at least one MicroConf attendee talk. He’s done a MicoConf mainstage talk. He used to host a podcast with Pat. Keith and I cover some really interesting ground today as he talks about why he shut down his million dollar marketing agency to build and double down on his SaaS.
Before we dive into that, I wanted to ask you a favor. If you’ve been listening to the TinySeed Tales episodes that are coming out on Thursday mornings, you have heard through episode seven that came out last week, there are two episodes left. Obviously, this Thursday and next Thursday. I’m curious to get your feedback on season two and frankly, just the whole concept of TinySeed Tales. Feel free to email me directly at questions@startupsfortherestofus.com. You can DM me on Twitter or you can mention me at @robwalling on Twitter.
Given the amount of time and money that they cost to produce, I’m curious to hear if you like the storytelling approach. Obviously, it’s a more produced form than really exists in our space. I enjoy doing them but I also want to make sure that they’re providing some type of value to you; whether it’s entertainment, motivation, inspiration, tactics—just anything that you’re getting out of it. I would appreciate hearing from you. Drop me a line and let me know what you think.
With that, let’s dive right into our conversation. Keith Perhac, thank you so much for joining me on the show today.
Keith: Thanks so much for having me, Rob.
Rob: Today, we’re here to talk about why a multi-million dollar agency owner decided to quit it all and move to SaaS. It’s a great topic.
Keith: It is. It sounds a lot more impressive when you say it.
Rob: Why in the world would you do that, sir? Now, we’re going to dig into that today. Just so folks have some context, you’re a software developer turned marketer—the dangerous combination. I love that combination whether it’s a marketer who learns how to code or a developer who learns how to market.
Keith: It’s like a superpower.
Rob: It really, really is. I don’t think people understand that enough. A lot of us developers, you do it for five years, you do it for seven years. You become senior and you’re like, man, I can do a lot of things. Then, you start over with marketing and it’s a grind. You don’t know any of it, you think it’s fluff. You get three, four, or five years into that and you pile those two on, it’s ridiculous. It’s like an epic, highlevel, multiclass in Dungeons and Dragons.
Keith: Yeah. Just to be able to understand how the internet and all that technology works makes you such a better marketer. People come to us and they’re like, why aren’t these things tracking right? Because you have no idea of how the internet works, why the scripts aren’t firing, and how URLs even work.
Once you understand that, it’s a superpower to get everything. That’s not even touching the automation you can do, it’s crazy.
Rob: Yeah. You were running a seven figure marketing agency. It was called Develop Your Marketing, focused on conversion rate optimization and building out funnels. You had marquee clients, big name clients folks I’ve likely heard of like Ramit Sethi and Eben Pagan.
You decided to build a SaaS on the side. I think you were using the same resources. You were kind of using the agency team to start building that out. That SaaS is called SegMetrics, segmetrics.io. I’m going to read a little bit about it so folks have a context of what you build, then we’re going to go back and kind of talk through your decision to build it, the highs and lows, the launching—just the whole story so folks can both be inspired by it and also feel the agony and the pain of what you felt in the early days. As well as takeaway some actionable stuff. Obviously, your story as a marketer and a developer, I think there’s going to be a lot of folks that can takeaway.
SegMetrics, your h1 is, “Get clarity on your true lead value in every step of the way.” The subtitle there is, “Get 100% clarity on where your leads come from, how they act, and how much your marketing is really worth. Get a handle on the Key Performance Indicators that matter most for your marketing funnels. Built by marketers, for marketers.”
When I think of analytics or attribution, I think of, okay, I have Google Analytics as this anonymous analytics and aggregated. I have a Mixpanel. There’s obviously those types of competitors for individual funnels and people walking through. Of course, I have Facebook Pixels, Google Pixels, and other things for conversions and dollar amounts. I think Mixpanel does that too. Where does SegMetrics fit into that mix?
Keith: The idea is kind of similar to Mixpanel in a way, which is we want to be able to see everything that anyone does in a customer journey. From what ad they landed on to how many times they viewed a page, to if they attended a webinar, to be able to understand who are the most valuable people who are going through your marketing funnel.
The problem with Mixpanel is that it has no native integration. It has no idea of revenue out of the box. It has a garbage in and garbage out problem. Unless you were really diligent about what data you’re sending into Mixpanel, you’re not going to get anything valuable out of it.
What SegMetrics does is we take that idea of like, okay, we want to see every event in an entire customer journey. Marketers are never going to be able to hook this up. What we need to do is integrate directly with all these tools to pull the data out of Google Analytics, out of Google Ads, Facebook Ads, your ESP, your CRM, your Stripe, your payment gateways—everything—and create an individual persona that we can then say this is this person from all this different sources brought together. This is their full customer journey.
Then, what we’re able to do is say, all right, we know that Facebook Ads, our lead value is $50 for each lead we bring in from Facebook. Within that, do we have actions that make people worth more money? Worth less money? Are there certain demographics that can make people more valuable? Is this idea of finding these segments of actions, or demographics, or people that are more valuable so you can then go after them more, be able to market to them better, and understand your audience better.
Rob: Yeah. That makes a lot of sense. It was certainly an issue that I’ve had marketing SaaS, as we were doing ad spend or even getting organic traffic of I had this aggregate numbers of, hey, this is what our churn is, for example. I couldn’t slice it based on demographics or oftentimes, even based on source unless I really have to finagle some stuff.
Keith: That’s why we built it. As a conversion rate optimization agency, that’s what we’re doing. We exported all of this data from all these tools, created a bunch of pivot tables. Five hours later, we had information.
Rob: Yeah. Inside SegMetrics, you can slice and dice it. You could look at churn. You could look at lifetime value based on all this stuff, right?
Keith: Exactly.
Rob: Okay, for me that paints a crystal clear picture. I think most SaaS founders who’ve gotten this far, who are doing $5000 or $10,000 a month or more, are trying to attribute stuff, know the limitations of having to build it custom.
We may have already answered my first question, then. My first question is why build a SaaS company if you’re running a seven figure agency? It’s obvious that over and over and over, you probably have to cobble this together with duct tape and baling wire.
Keith: Yeah. Essentially, we were working with an analytics agency—a friend—who did a lot of our analytics. We had a lot of our analytics done inhouse. We just spend so much time on it. We were spending probably 20%, 30%, of our week just pulling the numbers. That doesn’t even mean the analysis of what they’re doing but just pulling these numbers.
Okay, we have this webinar. What is the lead value of someone who attended the webinar? We pull all that data from whatever system we have then we pull it from all the tags. Then, we pull the revenue. Then, we match them together. Awesome. Then, we write up the report, the PDF, and everything. We take it to the client and they’re like, what about the people who came from organic versus paid? What’s that breakdown look like? I’m like, give us five more hours. We got to go through that whole thing all over again with these new things.
The analytics guy we were talking to and the guy on my team, we were talking about this, and he’s like, it’s just a database. It’s just a spreadsheet. Why can we not just slurp this data in and do this automatically? That’s where it kind of starts. Okay, could we do this? Could we scratch our own itch? Yeah, that’s where it kind of started from.
Rob: Today, you are a team of 10. As you said offline, “Growing very quickly.” Of course, I have your revenue graph here. You’re in batch two of TinySeed, I have access to your numbers. I will confirm that. Doing very well. In fact, your growth has accelerated. It really looks like at April, May, it starts kicking up which coincidentally—
Keith: I wonder what happened in April and May of this year? I have no idea.
Rob: I have no idea. Don’t think batch two started. We’ll get into that later on the interview. I want to do something chronological. You started working on this five years ago, back in 2015. You told me that you built it in two weeks, 2-3 weeks. That you had a customer the first week of launch. That sounds amazing. That is crazy, crazy fast—to build this whole that fast. Second, to get your first customer the first week of launch. Both of those things, how did those happen?
Keith: This is actually the second SaaS I built. The first one was Summit Evergreen which was a membership site platform for marketers. We had made some mistakes that time. We thought we knew what the customers wanted based on the consulting we have done. We built a very large, very complicated app that had a lot of features that turned out no one actually needed. It took us many months to get to market. Once we got to market, it was slow to get people in. It was very difficult.
With this, we built it to scratch our own itch. At the same time, we’re like, this is something that everyone needs. We’re not going to make the same mistake. What we did was we did a very hands-on, iterative process with our customers. We picked two or three customers—clients—that we were working with. We said, hey, we’re building this thing. Here’s the numbers that were looking to get this value. They would respond. We would say, awesome.
We did a raw dump of their data. We plugged in the engine. There’s no UI. There’s nothing at this point. There’s just me doing some math in a PHP file on the backend based off of the CSV. We get that in and we spit that out. We show it to the clients and we say, hey, for this webinar you just ran last week, this is the lead value. They’re like, oh my god, this is amazing. We’re like, okay, this probably has space.
Then, the team had a little bit of downtime. I think this was early February or late January. Right after a big launch. We knew we had two weeks of almost no client work. We decided, let’s put a challenge to ourselves. Let’s get the team together and we’re going to work on this fulltime for two weeks. We’re not going to do any client work because we don’t have much scheduled. We’re going to see how much of this we can build.
In two weeks, we pretty much had version one done. The engine was already built but the UI, the signup, everything around it, the creation of the reports, the spitting out the reports, the graphs, the everything we built around two weeks. Finally, we launched and it was the product of the day when we launched. Super excited about that.
Then, I found out that there was a space in our Stripe public key when I copy-pasted it into the site, no one was able to purchase. That was rough. It didn’t deter us. I think within a month, we were up to $1000 MRR.
Rob: Wow, that’s great. A lot of learnings from that. I think people think of an MVP as a limited version of a product. You really tripled down on that definition.
Keith: It was a text file. I actually have screenshots of me and Slack. Or not Slack, it was Skype. I just had a text file with six lines. I copy-pasted that. Again, is this valuable? I’m like, yes. That was it.
Rob: Yeah. I love that approach. I often talk about, in my first book, human automation of having VAs just do something on the backends and spit out a report. That’s really, in essence, kind of what you did there.
First customer in the first week of launch, you obviously solve a problem. 1000 MRR in the first month; were you getting those leads from clients, or were you actually doing marketing?
Keith: I don’t remember, to be honest. I know we had two clients that had decided to sign up as customers. A number of our clients we kept as just kind of free users. They weren’t interested in the numbers, but we needed it for our work so we did it internally. Then, the rest were people who found us either through Product Hunt or promotions that we did, tweets. That was five years ago. I don’t really remember who they were and where they came from.
Rob: Right. You mentioned to me as we were talking before the interview that you were at about $1000 MRR after the first six months. Is that right? Did growth plateau that much?
Keith: Yes. We didn’t hit $2000 until August of 2016.
Rob: That was more than a year later, because this was early 2015. What happened then? You basically rocketed to $1000 MRR, you solved the problem that people are obviously in a dire pain point. You flatlined, in essence, for a year. What happened there?
Keith: More than a year. More than a year, Rob.
Rob: You remember every minute of that. 15 months.
Keith: What happened was I had a day job. Not a day job like I was working for someone else, but we had the agency. The agency is pulling, like you said, $1 million+ a year. It’s really hard to take the team off of client work and put them on something that’s making $1000. We didn’t have any customers or any clients that paid us $1000, just $1000. That was inconceivable. I think our lowest contract was $10,000 a month.
It was very difficult for us to put the time into it. I think we language there—I’m looking at the graph—until mid-2018. Wow, you can actually see the spike. Mid-2018, I had decided that we were going to focus on SegMetrics. We always said, hey, we’re always the bride’s maid, never the bride. We’re helping our clients run these million dollar launches—multi-million dollar launches. We’re making good money but we want something that we control in our product, in our stuff. We had always thought this. We had SegMetrics there but we haven’t put any love and any energy into it.
That summer, I remember, I spent some time. We rewrote the UI. I said, we’re going to focus on this. Over the next six months, we’re going to transition out of consulting work, out of the agency work, and we’re going to start moving towards SegMetrics and something that we own.
I know it’s going to be slow because we make a lot from the agency and we need to wind that down slowly. That’s our goal. I was just so tired. I think the team was just tired of having this great resource that no one was using. We didn’t spend the time to make it worth it, to put it out there.
Rob: I remember having that same issue before I went full time in products. I was consulting. I had, basically, a micro-agency where it was either me or a few contractors that I markedup and billed out. It was software development. I remember billling $125 an hour, $150 an hour, somewhere in that range, for every hour. I was booked more than full time. 40+ hours a week I could work. I had these products on the side that were doing exactly that. I had a beach towel website that was doing $1000 a month. Net profit was $150 a month. I had DotNetInvoice which was doing a couple of grand a month, most of that profit.
When you compare those numbers, it’s like, I can make a couple grand in two days of work. It was such a struggle. I heard people call it an addiction. The cash agency work or consulting is this cash addiction. It’s amazing when you want to get to full time income or higher quickly but it’s really hard to move away from. As you said, the focus is constantly towards your high value, instant cash infusion, which of course, is working for clients.
It sounds like you got tired of it. You got fed up with it and you wanted to double down on something that you have built. You fired your whole team in order to do this in late December 2018. That must have been brutal.
Keith: It was rough. It was honestly rough. It wasn’t, hey, I decided to work on SegMetrics and I’m letting everyone go. The original plan was to bring everyone over and we’re going to slowly shift over. The team’s going to stay. There were a number of issues with that.
One of them was that same mental model that the company has of, hey, I can do work for clients and make a lot of money. Or, I can spend time and make no money with the SaaS, was also there with the employees, with my team. We actually had a number of conversations over six months. Essentially, what it came down to is, it was too hard of a mental shift to go from the client is asking something right now. I could spend an hour on that and the company makes X hundred dollars. Or, I can spend six hours working on SegMetrics and the company makes… There’s not a one-to-one translation.
At this point, I think we had done the agency for six years. Eight years, maybe? That was the challenge. We have an hour for dollar, time for money exchange with our clients right now. We do not have that for SegMetrics. We have time for literally nothing exchange. It was very hard for not only myself, but my team to prioritize that.
There are also other issues like when you only have less than 100 customers, you don’t need an account manager. Where do we take the account manager? We kept trying to find roles that didn’t fit for people. It was just very difficult. What I ended up doing at the end of 2018 was saying, hey, guys. You guys are incharge of SegMetrics. You guys work on SegMetrics. I’m going to handle all the client stuff so it gets it all of your plate.
The mistake I made was thinking that they understood SegMetrics as well as I do. I’ve been living it for a year at that point, mentally. Trying to think of, what are we doing next? What are we doing next? It was a mistake on my part. It was just a shift that couldn’t happen.
What happened in January, I said, guys, we can’t do this anymore. I helped find them new work, introduce them to clients. Honestly, it was heartbreaking. I worked with these guys for 6-7 years. It’s really rough. The good side of it—kind of the windside of it—is that because SegMetrics has been growing and because there’s very little of the agency side left, I’ve actually brought them back on in the last few months. I’ve brought the team back together and they’re now working in roles that I think run to their strength instead of the things I was trying to force them into, which is really wonderful. I love working with them and I’m glad that they’re back on the team.
Rob: That’s such a cool ending to that story. When you’re in the midst of that, it probably feels devastating. Yet, to circle back two years later and be like, hey, we have a product now that can afford all of us, that makes the salaries. It’s an incredible story. That’s cool.
As you’ve contacted people, I’m assuming you’re bringing them on one at a time, you email them like, hey, want to come back and work on SegMetrics? Are they stoked? Are they over the moon to do it?
Keith: I don’t know. Yes, they were. I was always very nervous about the whole thing because I let them go. I felt like I had failed them, in some way. It was very nerve-racking for me to reachout, to talk about that, and bring them back on. We had talked in the interim. It’s not like I had cut them out of my life completely. I hope there’s no ill will. I enjoy having them back on. Mentally and emotionally, it was a very rough time, I guess.
Rob: I imagine, it seems to me, if I were in your shoes, it would almost be a mix. You have to let these folks go, even working with them. At the same time, once that’s done, you were then full time on SegMetrics—focused, right? By January of 2019, this was a month or two later, you were, essentially, for the first time since you launched it, you’re all in on it. That had to feel good.
Keith: It felt good. It felt very good. It did come with some challenges, though. When there’s other people around, there’s blame to go around. I see this a lot with my family as well. It’s like, it’s noisy here, I can’t concentrate. Or, the kids kept me up last night. I can’t get my work done.
Then, when it’s just you, all those excuses go out the window. You’re like, crap. The reason I’m not being productive, the reason I’m not focusing on what I should be doing is not some external force on me. It’s because I’m an […]. I need to get in gear, get my mental state insync so that I can do my work, and focus on the things that are important.
Rob: Yeah, that’s such an interesting thing. You mentioned to me offline that your family actually left for six weeks and you weren’t able to go with them. They went to Japan, where you guys used to live. You were left alone at the house. Probably, your inner monologue is, finally, all the interruptions are going to stop. It’s going to be so quiet. I’m going to get so much done. That’s not what happened.
Keith: No. The first two days were great. After that, I just had to start wrestling with my own existence at that point. I’m like, why am I not being productive? I remember back when I was younger, I could pull those 14 hour days, it was great and I felt energized by that. Now, I’m almost 40, I’m going to be 40 this year. I don’t have that same energy. There’s a lot of mental stuff that went around that. I had to understand what are the things that make me productive, what are the things that don’t make me productive, and how can I get rid of the things that don’t make me productive.
Rob: Yeah. There’s so much about learning your own psychology, managing that, and learning yourself. Same thing for me, when I was in my 20s, I could do 12 hours a day plus, sometimes, 14 hours a day. That was the point where Sherry went to Africa for a month, I believe. During that time, I would come home from the day job and then I would kick on a season of Friends. I make dinner, just sit on the couch, and code. I was coding side projects. This was 18 years ago or something.
Man, I got so much done. I would basically work from 5-6 at night until 1 or 2 in the morning. I’d get up the next day and go to the day job. It was kind of exhilarating because I was building my own thing. Within a month, she came back and I had launched a product. I believe that was FeedChat, it was a really early one that I did that crashed and burned.
During that time, she came back and I started talking about Ross and Rachel as if they were my friends. I was like, oh, yeah, Ross was saying… She was like, you know they’re not real, right? You know that they’re not real people, right? That’s always been a funny joke.
It’s learning about your own psychology. Obviously, in my 30s and now early 40s, you have to know more about yourself, I think. Atleast, I have to learn more about myself, my ability to make myself focused, and make myself get stuff done. It sounds like you’ve gone through the same thing.
At the beginning of 2020, eight or nine months ago, you hired a project manager to manage you—to basically bust your chops. Tell me about that. It’s pretty smart. I know some people get executive coaches or business coaches who they meet once a week or twice a month or something. You hired someone who’s more in the business and almost they’re like driving tasks. They’re keeping you accountable.
Keith: Yeah. Even before I really had the team back, we were creating quarterly goals. We were creating, okay, this is what we’re going to be working on this month. It gave me two things. One, it kept me on task. If I went off rails too many times, sure, you’ve got something come up with whatever, she kept me on. Like, hey, if you don’t start on this stuff, we’re not going to finish it by the end of the month. We’re not going to finish it by the end of the quarter. Usually, the things that you said were important.
That was one thing that was highly valuable to me because I default the coding. I don’t default to launching or to marketing or to any of that. I default to sitting and building out new features because that’s what I enjoy doing. That’s not going to move the product. She was very good at keeping me on what needed to be done for the business.
The second part of that, which I thought was just as valuable, was that at the end of the month or at the end of the quarter, she’s like, here’s all the things you got done. It was mind blowing. I’m one of those people who no matter how much I get done, it never shows that I got anything done. I feel like I’m constantly busy but I’m not getting enough done in the time. To have her come and we go back over the last month or the last quarter and say, we got 80% of the key tasks you said that you’re going to get done. You got all these other small things that came up during the month that, maybe, didn’t get done. The key things you said needed to get done this month, got done. That was amazing. It was empowering to me.
Rob: Yeah. The accountability alone—to end that, it’s knowing yourself, right? Some folks I know, they can go to the gym, they want to do it on their own, or they get equipment at home and want to workout in their own garage and prefer not to be in the social setting. Other folks want a trainer so that they have to show up this many days a week and get their chops busted. I think that’s kind of a cool hack. Again, I’ve heard other folks hiring CEOs, coaches, or executive coaches but this was a little different take on that. I thought it was interesting.
Keith: It was actually Ramit Sethi who hired someone off Craigslist to slap him each time that he looked at Reddit or anything like that.
Rob: Oh, geez.
Keith: He did a whole blogpost about this. Essentially, he hired someone to sit next to him. Everytime he goofed off, looked at Facebook or something, she just slapped him.
Rob: That’s like a reality TV stunt.
Keith: That’s the value that having my project manager gives me. She’s not physically slapping me but that’s the value that I’m getting out of it. Like, hey, stay on task. You’ve got stuff to do.
Rob: Right. It sounds like you’ve kind of hacked your own psychology a bit with this project manager and fixed that weakness, I guess, for now. Switching gears a little bit, you talked about—I saw it in the TinySeed Slack—that one of the low points of your year was earlier this year. It was a technical snafoo with the database. I’m going to make you relive this. We’ve all been there, you’ve just got to tell the story, man. It’s going to be painful. Do it once. We’ll get it on tape.
Keith: Databases, they are my kryptonite, I guess. What happened was that there’s something in Maestro 57 or whatever you’re using that made the database fillup in about an hour. We went from 30% full to completely full in an hour. Of course, if it’s full, it’s not going to write new data. We’re f-up there. Trying to figure this out, freaking out, and there’s no way to compact it down. I think it’s like a 12-year bug in mySQL.
I finally gave up and said, okay, we’re just going to export the database, create a brand new one, and do it over. We did it. All right, we’re safe. Cool. Two weeks later, the exact same thing happened. This has taken a week of my life at this point. Just to migrate this thing, do it, and make sure everything’s done in this whole thing. Then, we have to do it again. I finally say, I can’t do this anymore.
We moved to a managed hosted solution through DigitalOcean who’s our providers. They have a hosted database setup. We migrate everything over there. Finally, we’re good. All the tests were perfect.
I go to sleep. I wake up to my phone buzzing again. I’m like, oh my god, what now? Apparently, there are some setting differences between how they have it setup and normal mySQL that was causing a bunch of imports to fail. All of our tests ran. I think it was four weeks or maybe six weeks of just screaming constantly about this database issue, throughput issues, and speed issues. It’s just miserable. Just absolutely miserable.
I don’t know what people are supposed to take out of this because it was just painful. The thing that I took out of this was that the reason I was running the local database in the first place, not to manage one, is because it was a fourth of the cost. I was like, I can do this better, I can have it customized, and I’m going to be paying a lot less. That was great until the database exploded. Then, exploded again. I lost 4-6 weeks of productivity because I didn’t want to pay, I don’t know how much. Maybe $100, $300, $200, extra per month for managed solutions.
Rob: Man, as a bootstrap, I would have done the same thing. It can be obvious, in retrospect, like, oh, I just paid a few hundred dollars because it made sense. There’s so many decisions you have to make as you’re growing. You can’t always do the Mercedes.
Keith: You can’t throw money at all. There’s just too many.
Rob: That was a big difference once we sold Drip to Leadpages. You could just throw money at it. They had raised $38 million in venture. I remember having strategic conversations with the senior leadership. I’d be like, man, that’s going to be tough. They’re like, what is the requirement? I’m like, we can just throw a bunch of servers at it. It’s going to be expensive. How expensive? For this event, $5000. Then, they laughed. I was like, bro, this is not even worth the conversation. We just wasted that much in dollars.
It was a nice luxury of having. Obviously, we weren’t flipping with money. You shouldn’t be and all that stuff. Frugality has its own reward. In the sense of having your database managed, I think there’s a lot of value there if you can swing it.
Keith: Yeah. It’s the core things of your business. If this goes down, what is the impact to the business? What’s the chance of it going down if someone else is managing it versus yourself? I don’t think doing a managed server from the beginning was the right move. Once we started having issues, we should have really looked at it instead of trying to do multiple migrations to other self-hosted stuff.
Rob: Yeah, I think that makes sense. As we transition to closing, as we’re getting to time, I did want to dig in, we teased it at the top of the show that your growth has really accelerated since April of this year. Just over the past five months, there’s a real noticeable uptick in your revenue graph. Of course, I’d attribute that to you starting TinySeed. I am curious, what have you done differently? Obviously, in TinySeed, one of the earliest things to talk about is pricing. A lot of the SaaS founders just don’t have pricing dialed in with the value metrics, whether it’s too low. You tweaked with your pricing. I’m curious if that had an impact or what else?
Keith: I think that there were two main events in SegMetrics’ five-year life that moved the needle. One was focusing on it full time. There’s a big jump in revenue starting when I decided to focus on it. The second one was TinySeed. The jump for TinySeed was much bigger than the first one.
The way we changed pricing, I think, had a lot to do with it. What we had originally with our pricing model was essentially large buckets. You were in the starter bucket until you hit 50,000 contacts. As soon as you had 50,001, you had to pay $100 extra. It was difficult because people try to keep their contacts low. People would always email us. Like, hey, I’m only one over. Can I have it cheaper for now? I was like, yeah, sure. Fine. Just one.
People, they upgrade processes with manuals. There’s always stress around it. It’s this whole thing. The pricing is actually pretty similar. I think for the majority of people, they’re paying around the same amount. What we changed was that pricing is now increasing based on the number of contacts you have but only $5 at a time.
The big difference is now not that you are going to hit a wall and suddenly be paying twice as much. It’s like boiling a frog, you’re slowly going up as you get more profitable. As you succeed in your business, you’re going to pay us just a little bit more. That, I think, has made it much easier for people to do that upgrade because people don’t really care about the extra $5 a month. They do care as soon as they hit that threshold of, okay, now, your bill has doubled.
Rob: That’s the thing with pricing. You didn’t really change your pricing. You kind of changed how it auto adjusts. That’s one of these things that is a challenge to foresee if it’s going to make a difference. I think there’s a lesson folks can takeaway. If you do have these big gaps, maybe have smaller tires in between the published tiers. We did this as well with Drip back in the day, where we would go based on subscriber count and have it go up every 1000 subscribers or every 2000 subscribers versus every 10 or 20, like we originally did. It did make a difference for us.
It’s almost closer to metered pricing. True metered would be like $0.5 per subscriber. For you, it would be absolutely per contact. You’re not doing that. It’s still in small tiers but I do think that there’s value in thinking about that.
Keith: Yeah. The other part of it, I think that’s the biggest one. Also, just deciding what integrations, kind of the Zapier model of, okay, if you’re using HubSpot, you’re not going to be a hobby user. Your base price is going to be higher. You have to start out in a higher tier if you are higher level. They require more support, they require more effort. We’re dealing with bigger companies. That, I think, also helped a lot. Before, it was just contact-based. Now, it’s contact plus features.
Rob: Sir, thanks again for joining me on the show. If folks want to keep up with SegMetrics on Twitter, it’s @segmetrics. Obviously, segmetrics.io. You, let me see if I can pronounce it right this time. Is it harisenbon?
Keith: That’s close enough.
Rob: How would you pronounce your Twitter handle?
Keith: Ha-ri-sen-bon.
Rob: Harisenbon, @harisenbon79. We’ll link it up because it’s kind of hard to spell.
Keith: I’m so bad at naming. I can’t believe I ever got into programming. It’s really what it comes down to.
Rob: The two hardest problems in programming are naming cache invalidation and off by one errors. Yeah. You’ve heard me tell that on MicroConf.
Keith: I love that joke.
Rob: Sir, thanks again for joining me on the show. I hope you had fun today.
Keith: I did, Rob. Thanks so much for having me.
Rob: Absolutely. Thank you so much for joining me today. I hope you enjoyed my conversation with Keith Perhac. If you have not headed to startupsfortherestofus.com and entered your email address to receive the two exclusive episodes and PDF guides, I would encourage you to do that. The first one is called 8 Things You Must Know When Launching Your SaaS. Second is 10 Things You Should Know As You Scale Your SaaS. These are two podcast episodes. They’re Rob solo adventures where I run through 8 things and 10 things respectively, that I think you should know as you launch, then as you scale a SaaS app. These are things that I have not released on the podcast. They’re not on my blog and really not available anywhere else.
Check it out, startupsfortherestofus.com. You can checkout the right message popup in the lower right or really go to any page and opt-in the right handside to join thousands of other startup founders who are bootstrapping and mostly bootstrapping ambitious SaaS apps.
That’s it for this week. I will talk to you again on Thursday morning on TinySeed Tales season two, episode eight. I will be here in your earbuds again, next Tuesday morning.
TinySeed Tales S2E7 | A Global Pandemic
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Brian & Scottie Elliott are the husband & wife co-founders of Gather, an interior design project management app.
Today’s episode was recorded after the COVID-19 shelter in place orders went into effect. We talk with Brian and Scottie about how the pandemic has affected Gather as well as their life beyond the scope of their business.
The topics we cover
[01:10] How the pandemic has affected their lives beyond the scope of their business.
- Brian and Scottie live in Mexico
- Living in almost what feels like two worlds here. The ex-pat community is very tuned into what’s happening in the US and sheltering in place
[03:11] Current financial situation
- Our situation hasn’t changed financially. I think that at the time we had hopes that we could raise some money or at least get alone. We’re not even pursuing that at this point
- We’re certainly used to bootstrapping and feeling that stress and coming up with interesting solutions to our cash problems.
[05:57] High point or biggest wins since the last episode
- We have had a couple of requests for enterprise plans, one existing customer that has a lot of data that they need to be migrated over and they have a custom feature that they want
- Then a new customer who has a custom feature in data migration.
- It’s unexpected. Feasibly you think they’re going to cut back expenses, but larger deals are coming your way.
- The churn that we have had has been largely solo designers and smaller firms
- One of the things of going upmarket, the typical pattern is there price sensitive, they churn less.
- We’ve had a lot of inbound interest and a lot of them are saying things like now that we’re home working remotely, we’re sort of investigating better ways to work online
[09:21] Impacts from the COVID-19 crisis and biggest setbacks so far
- Across the portfolio of companies that are part of TinySeed, there is about 15% that are having real struggles with the impact of the pandemic on the industry they serve. Another 70% are waiting to see what happens, perhaps cutting back on expenses and generally seeing a growth plateau. Then, there’s the 15% of companies for whom remote work is a boon and their growth is accelerating faster than ever.
- Gather has had to cut their developer contract in half
- Big features are kind of on hold for a little while
- Staying focused has just been difficult
[13:54] Fears and hopes for the future
- I think my biggest fear is that the trend that we’ve seen this month as being a big uptick in sales and opportunities is just a flash in the pan.
- In different times, we might be able to pivot if we needed to, but because of our financial situation it’s going to be hard for us to pivot out of it
- Looking forward to seeing how these enterprise deals play out
- Trying to figure out ways that we could get customers to pay for some of the features that we’d like to build
Links from the show
- Gather | Website
- Brian Elliott | Twitter
Thanks for listening to another episode of TinySeed Tales. If you haven’t already, be sure to check out Season 1 of TinySeed Tales where we follow the Saas journey with Craig Hewitt of Castos.
Episode 519 | Profit Sharing, Stock Options, and Equity (A Rob Solo Adventure)
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On this episode, Rob talks through profit sharing, stock options, and equity and makes a comparison between these various approaches.
If you are thinking of ways to incentivize team members as a bootstrapper, this episode is for you.
The topics we cover
[04:34] Bonuses
[07:52] Equity Grants
[11:47] Stock Options
[20:09] Profit Sharing
[26:09] Which is best for your SaaS?
Links from the show
If you enjoyed this episode, let us know by clicking the link and sharing what you learned.
Click here to share your number one takeaway from the episode.
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
Subscribe & Review: iTunes | Spotify | Stitcher
Turns out, the rumors are true. This is Startups For the Rest of Us episode 519. Thanks for joining me again this week. I’m going to be running a solo adventure today, talking through profit sharing, stock options, and equity, and doing a comparison of those various with the thought of incentivizing employees and team members in mind. This is the conversation I have had at least five times and maybe six in the past three months, so I figured it was time to put some thoughts to tape so it’s a resource I can use to point people in the future.
If you’re thinking about whether as a bootstrapped or mostly bootstrap startup founder, whether to set up a profit-sharing plan to offer stock options to do equity grants or to just pay bonuses or other ways to incentivize your team members, that’s what I’ll really be working through today.
First, I got a couple of the best podcast reviews I think we’ve ever had. The first one is from BrettxKelly via Apple Podcast, and he said, “Rob is the Chuck Norris of bootstrap founders. Thanks for all you do, Rob.” I really appreciate that, Bret. I appreciate the sentiment and the creativity of it.
The other one, the subject line is, “The podcast that changed my life. This podcast was instrumental in my journey from a blah day job to a successful tech founder. Rob and Mike for the first 450 episodes (or so) bring useful, actionable advice every week. I also really appreciate the honest delivery with none of the radio DJ sliminess that so many podcasts seem to embrace.”
Thank you so much for those reviews, and if you haven’t left us a five-star review in Apple podcast, Stitcher, Spotify, or wherever you partake of this show, I would really appreciate it because it definitely helps keep us motivated and it helps bring more listeners to the show.
Next, I wanted to mention hey.com. I’ve mentioned in the past that Basecamp is a headline partner with MicroConf and in partnership with MicroConf, I have had a few Basecamp ads on the show. We are switching those up, and are now for hey.com. If you’re listening to this podcast, you may have heard of it.
If you go to hey.com, you’ll essentially see that the folks at Basecamp have created an entirely new email service, and they say it’s “email’s new heyday. Email sucked for years. Not anymore — we fixed it. HEY’s fresh approach transforms email into something you want to use, not something you’re forced to deal with.”
Hey allows you to screen your emails like you screen calls. You can fix bad subject lines without busting threads, easily find your most important emails every time you log in. They have a built-in reply later workflow that was built from the ground up, and they block email tracking pixels among many, many other things.
I know many of you listeners are already using hey.com, but if you have not checked it out, head over to hey.com and you can try it free. Thanks to Basecamp and Hey for supporting independent startups, MicroConf, and Startups For The Rest of Us.
Let’s dive into our topic for today. As I said at the top of the show, I’m going to be talking through profit sharing, stock options, and equity. I touched on bonuses real quick just as a side note because it occurred to me as I was writing this outline that I should probably address that.
I had this conversation a bunch of times in the past three, four months, and have sent out a bunch of thoughts via email to folks. And I realized, if I just gathered those thoughts, put the bullets on paper, and talked it through that I can probably create, hopefully, an evergreen resource for folks who are thinking about motivating their team members.
I should be really clear that I’m not a lawyer, I’m not an accountant. Do not consider this legal tax advice or any kind of tax advice other than things I have learned from my own experience dealing with these types of incentive programs.
I’d also like to point out that I actually had a conversation with Dru from Trends.vc. If you haven’t checked out Trends.vc, Dru is putting out two reports a month on different trends he’s seeing in the startup space, the bootstrapping space, and he’s creating insightful reports and thoroughly thought out reports. I believe the reports are $20 each if you want to buy the paid version. Each one has a free version, or you can just subscribe for a nominal fee per year. I’m a premium subscriber.
He and I had a conversation a couple of weeks ago when he was preparing his report on profit sharing. If you haven’t checked that out, head to Trends.vc and you can pay a one-off $20 to read his report that’s focused on profit sharing. But today I’m going to be talking about profit sharing, stock options, equity, and touch a little bit on bonuses.
Let’s start with this first question of, I have one, five, ten team members. Why should I give them anything beyond just a salary or their hourly rate anyway? The idea is to align incentives. It’s to motivate people, not just by giving them amazing work to do every day, but to give them a financial incentive to really stick around.
Some people look at it as a retention incentive to not go elsewhere if they can do the same work and make more money. Others look at it as a way to make people just enjoy their jobs more or want to work a little harder and put in some extra hours because they feel like they can make a difference.
There’s a lot of different ways to do it, and of course, this is not a requirement. Giving bonuses or profit-sharing isn’t a requirement, but I personally feel like if your team is cohesive and is working hard to get the same end goal and you are creating profit, creating value, creating wealth. To me, it does feel right (in some way) to share that with your team members.
The first question of why not just give bonuses? Well, you can, and maybe in the early days, that’s something to think about. The big downside to that is oftentimes, bonus programs are pretty arbitrary. You’ve really just had to make a call and say you get a few thousand, here you get $5000, you get two weeks of pay at the end of the year or whatever.
It can feel a little squishy if you try to do this overtime for many years. People can feel like they get left out or they play favorites. Or if they talk among one another, they can feel like perhaps you’re giving more money to someone who doesn’t deserve it. You also don’t want to reinvent the wheel every year. You don’t want to have to reevaluate every year who gets how much bonus and why. As I said, it can feel or even be arbitrary.
In addition, there have been lawsuits from employees of companies where they’re given bonuses every year and they come to count on those bonuses as part of their income and the employees won. I believe this was in California many years ago, so even using the word bonus can be dangerous if you do it year in, year out.
If I were a brand new startup, I had one or two employees, and I wasn’t able to give a bonus one year or maybe two before I got something really structured in place, that’s probably okay. It’s a risk tolerance thing, but it can be dangerous long-term in terms of people to become reliant on it. And if there’s no formula (so to speak) of how to calculate that, which is what profit sharing and the others give you a formula or it’s a set thing that you don’t have to keep rethinking about and reinventing.
Lastly, bonuses are tough because incentives aren’t exactly aligned, are they? Something about profit sharing that’s nice is if the company doesn’t churn a profit that year, people don’t get the profit sharing. Whereas if a company doesn’t turn a profit and you don’t give bonuses, people can be really angry, and they can blame management or their owners. Or they can say it’s mismanagement, and you spent too much money on whatever thing that they don’t like. Therefore, we didn’t get bonuses because we didn’t get a profit.
Bonuses, I think, have a time and place. I think these days, profit sharing or stock options are actually probably better ways to go.
The second thing I want to touch on is equity, and I’m going through this almost in a reverse order of which I think you shouldn’t do. The reason equity is tough, meaning if you just give 1% of your company to the first employee or 3% to the CEO you bring in. Equity grants are not stock options. These are equity grants where you are literally giving a portion of the company. They are taxable on the current value of the company.
While that can be arbitrary, if you have a company—SaaS companies that are doing millions in revenue and you’re trying to give someone 1% of it, the IRS is not going to believe you when they file that the value of that 1% is $1000. You can have serious taxable events if you are given a substantial amount of equity or even an insubstantial amount (to be honest) if the company is large enough.
Now, I will say, if you run a services business, oftentimes—if you run an accounting firm or a legal firm—those can tend to have buy-ins, whereas you come up to become a partner, they value the business. They say, okay, you need to buy 5% or 10% of this business, and you have to buy-in that amount over the course of years. The partners are (in essence) taking that money out.
That’s not a taxable event for the person buying in, that’s different. It’s not an equity grant, that’s just buying into a business, and that is a model. Professional services usually use that model. I’m not talking about that, I’m talking about you’re running a SaaS company and you’re considering just granting equity to someone.
Aside from it being a taxable event based on the current value of the company. Assuming you are running a pass-through entity like an LLC in the United States, if you give someone equity, they now get a K-1 at the end of each year, which makes their taxes more complicated. And if they have never dealt with a K-1, they’re maybe going to want to hire an accountant to do it.
You can imagine this isn’t a big deal if it’s two founders of a company, but what if it’s 20 or 30 employees that you want to incentivize? You’ve suddenly complicated everyone’s taxes. That’s not an ideal outcome.
Another thing to think about is whether you are an LLC or a Corp, you need to have restricted units that vest over time. This would be, even with an equity grant, I wouldn’t tend to just give someone 1% or 3% right at the start. Typically, you have a four-year vesting period, and there’s an initial one-year cliff where they have to work for a year before they get any of the equity. And at that point, they get 25% and then vest it over the three years. That’s the most common approach. Obviously, talk to a lawyer to get specifics.
The interesting part about equity is it does make profit-sharing easy because if someone owns 5% equity and you take out a distribution, then they get 5% of that distribution. It’s simple. It’s tried and true. Equity has been around for hundreds and hundreds of years. It is simple in that respect, but honestly, there can be a danger too.
Let’s say you have an LLC. It makes $500,000 in profit that year, and you’ve given 1% equity to a key employee. Even if you haven’t’ pulled money out, it’s still in the LLC bank account. They get a K-1 for 1% of that $500,000, which will only be $500,000. But in essence, they would then have an income tax bill of $5,000 even though no money came out of it.
Equity makes things complicated. I’ll just put it that way. Know what you’re getting into. To me, equity is for founding employee type folks. If you have co-founders, you know what you are getting into. Straight equity with some vesting is something that a lot of us do. That’s how it’s normally done. But for employee incentives and aligning incentives, I don’t think personally it’s the best way to go.
One last note, if you hold equity for less than a year, it’s short term capital gains. And if you hold it longer for a year, then it’s long term capital gains. That’s one of the best parts of it is if you do have an exit, whether you sell your shares or whether the whole company gets acquired, you do get that nice capital gains treatment. Instead of essentially paying income tax levels on it, you pay 15% or 20%. There’s a much nicer basis there or there’s a much nicer tax outcome. Those are my thoughts on equity incentives.
Let’s move on to stock options, which are the standard Silicon Valley way to motivate folks above and beyond their salary. A stock option is just an option to purchase stock in the company. It’s a specific amount. You’ll say you have 10,000 options. It means you have an option to purchase 10,000 shares at a particular price called the strike price, and that’s set each year by a company’s filing with the IRS.
That strike price is usually quite a bit less than their last funding round. It doesn’t always wind up being that way, but what they say is, okay, you’re starting with us today. Here’s 10,000 options. You have to work for a year. […] Work a year, then you get $2500. And then each month after that, you get essentially 1/36 of the remaining amount up to four years. They typically give you another big chunk of options to keep you retained so you’re always working to just build that up.
A lot of folks don’t exercise their options. They just keep them around, and as long as you’re working at the company, you can just wait until there’s a liquidity event. Of course, the downside of that is paying short-term capital gains on it.
The good news about stock options is there are no capital gains to worry about. If you grant someone options, there’s no real value to them because essentially there’s an option to purchase at the price the company was worth when you’re given the option, so that’s not a taxable event. And they don’t receive a K-1 that complements their taxes, since they’re just an option to buy a share in the future.
It’s actually not owning equity, and there’s no profit sharing unless you would execute the option. They’re designed to payout if you have a liquidity event like going public or being acquired. I guess if you had options in an LLC, it wouldn’t be called stock because there’s no stock in an LLC but unit options, and then you exercise holding those. In theory, if the LLC took a dividend or distribution, you could get that. It’s a very uncommon scenario, and I don’t think people would typically go for that.
The other interesting thing about options is there’s usually this exercise window where if you leave the company and you haven’t exercised any of your options, you usually have about three months. And if you don’t buy the options, they just revert back to the company and you get nothing. I don’t really like that. I actually disagree with that. I don’t think it’s super ethical. I feel like that window should be much, much longer—one, two, three years—and there is a push for that to get longer because it kind of screws employees.
You think about an employee who comes in and they’re going to get 10,000 shares at a $2 strike price. That’s $20,000 worth of options. They work for the company for the full four years, and then they leave. They have this $20,000 that they could purchase. Maybe they don’t have that much in cash, or maybe it’s not a gamble that they can make at that time. But maybe the company sells or goes public a year or two later at $10 a share.
It’s a big gamble for some people to make, and I feel like having a longer time to evaluate that and a longer time to be able to purchase options feels to me like a better way to do it, a more fair way to do it.
The last thing before I tell you my own story about an experience with stock options is that if you exercise your options, you pay the money, then you own the stock in essence. Usually, it’s restricted stock, but it depends on if the company is private. It often has restrictions that you can’t sell it for a certain time.
But if the company is private, then you are typically just holding stock that you can’t sell. If they’re public, you can typically execute and then sell the same day or the same week. You then pay short-term capital gains on any gains that you get. You pay income tax. What I have heard about are folks who have enough money that they’ll exercise them. Hold them for a year, hope that the stock is still higher than when they exercise, and then you get long-term capital gains treatment on that.
My own story with stock options is back in probably about 15 years ago, I was a lead developer and a technical lead for an early prepaid credit card company in LA. We got options and I worked there—I got X thousand options granted, and I only stayed there for 2 years before I went out on my own.
I got half the options that were granted, and when I left, I had to make the decision within 60 or 90 days. Do I buy these? I did, I bought them all. I wound up spending under about $10,000, which is quite a bit of money for me at the time. I figured, hey, it’s a gamble. Maybe it’ll turn out.
Within a year or two of leaving, they raised another round of funding. They didn’t go public, but they allowed people who owned stock to sell a certain percentage of it. I don’t believe I sold any in that offering, but I did sell a little later for about half of it for 10X gain, and then another half for between 10X and 20X gain. It was several hundred thousand dollars, which was obviously really nice at that point in my life. We used a big chunk of it as a down payment on a house, then a chunk of it to fix the roof on the said house, and fix a bunch of other stuff that was broken. Don’t get me started on homeownership. But all in all, it was a good outcome.
If I had stuck around another 2 years I could have made double the money. But I’ve always thought, those were the years that I really cranked up on entrepreneurship. I started writing my book. I built the Micropreneur Academy. It was some early-day stuff. There were a lot of opportunity costs that probably wouldn’t have been worth it.
But my experience with stock options is that one experience. They did later go public, and I actually sold the last of my shares after they went public. My experience, of course, was positive. The reality is in almost all cases, there is no liquidity […]. Most startups fail. Most venture-funded startups fail, and so most venture-funded stock options really aren’t worth it. They just aren’t worth the money, aren’t worth the paper they’re printed on (so to speak).
That’s the reality of gambling on startups. We know that as founders. That it’s dangerous and that it comes with risk. I think it’s harder as an employee when you have so much less control over the company and over the success of it. But these are your choices that you have to make as an employee.
Now, as a founder, as a CEO, if you’re going the Silicon Valley route, you’re raising a big round of venture funding, and you’re doing the Delaware C-corp, stock options are the standard way. If you did anything else, people would look at you funny. I think with bootstrap startups, you can do this.
I think a big question is stock options typically aren’t worth much unless you plan to have a liquidity event, and that doesn’t mean sell or go public necessarily. You can sell shares on a secondary market. Future employees can buy them back. Founders can buy them. There can be some type of liquidity events that can happen. You could take just a minority investment even at some point if you wanted to provide liquidity for employees with a stock option pool.
The bottom line is most startups and most SaaS apps do sell at some point. The vast majority, they do sell within whatever timeframe we could define, 7-10 years. There are very few bootstrappers who are still running the same SaaS product that they were running 10 years ago. That is a reality to think about is there may likely be a liquidity event even if you don’t particularly plan on it today.
I think stock options are a reasonable choice. I hate to even make a recommendation for or against. I think they’re a longer-term play for sure because they do require that liquidity to be worth anything versus profit-sharing, which is more short-term cash out of the business type approach.
But frankly, if you’re not going to pull cash out of the business, if you’re in a high growth market—I think about when we were growing Drip—we weren’t pulling cash out of the business. If we had implemented profit sharing, people would have wanted us to become profitable. The goal at that point was not to be profitable yet, it was to keep growing. In that sense, I think a better motivating or incentive alignment would have been through the use of stock options, even though that can feel weird.
I think about an LLC having stock options, and it’s totally possible to set up a structure like that, but it can feel a little different than the typical C-corp setup. Again, I want to reiterate that not only am I not a lawyer or an accountant, but there are just a lot of pros and cons to these things. If there were one right answer, then everyone would choose to do that. It just depends on the situation and the specifics of the type of company you’re trying to build and how you’re building it. If it’s going to be profitable in the short-term versus long-term, and how you want to structure things for yourself.
Lastly, let’s talk about profit sharing. What’s nice about profit sharing is if you don’t ever plan on selling or having liquidity events, then money and profit distribution make sense. It’s what real businesses are built on. Real businesses sell real products to real customers. To me, again, it makes sense to share those in some form or fashion that the employees and the team members who are building that company with you get to share in some form or fashion.
One drawback to profit-sharing that you don’t see with the other approaches is that if an employee leaves, they don’t take the profit-sharing with them. It ends when their tenure with your company ends. It’s not like having equity or stock options where you can hold onto these things for a future gain. I left that credit card company two, three years before it went public. But I had that lasting piece of equity that I had exercised. It’s maybe not as ideal for employees who want to leave, which works as an incentive to keep them there but can also be a bummer for folks when they leave.
One thing I would think about if I were structuring profit sharing is to make it a pool, not a committed percentage to an individual. That’s a mistake you can make with an early employee is to say, oh, you get 1%, 2%, or 3% of profits. I would think more about, hey, let’s have a 10% profit sharing pool, and all key employees share in that, or all employees share in that.
Such that as you add more people, obviously, that first employee’s percentage of the whole chunk will go down. But ideally, the company should be growing, and these individuals should be contributing to that. If you’re going to do profit sharing, you probably want to stay away from being a C-corp because that’s going to give you double taxation, so you’re going to want to be in a pass-through entity.
Again, I mentioned Trends.vc at the top of the show, but there’s a really good report that Dru put together over there talking about the ins and outs of profit sharing. The best article I’ve ever seen written on profit sharing is from Peldi Guilizzoni. He wrote about the profit-sharing that he designed for Balsamiq. We’ll link that up in the show notes. But he basically said, they started off with a 10% pool—10% of the profits. I believe each quarter was distributed, and then he moved that to 15% at a certain point, years into the company. Now he’s up to 20%. I love that range right there. That feels really solid to me. To be honest, that 10%-15% stock option pool is also the standard size that a Silicon Valley startup would have.
That number does ring in that zone that I feel personally comfortable with. From Peldi’s article, one thing he talks about is they do quarterly distributions, which is probably what I would do if I was going to do it because if you do monthly, it’s too often. It’s just too much paperwork. If you do yearly, then people wait around and it’s bonus season. People will stay past that mark.
If they’re unhappy, they collect the profit sharing for the year, and then they take off. I don’t like that gap. It should be 3 or 6 months tops. But Peldi says, “Our quarterly bonus program allocates 20% of profits to full-time employees: 25% is split equally and 75% is split based on seniority, then it’s all weighed by the cost of living in each location.”
That’s how he structures it, and I do like that there’s a part split equally. There’s a part split by seniority. I have also heard of folks doing it based on the amount of salary people make, and then not having that cost of living of your location factor in because that’s already factored in.
One thing I would stay away from personally is using performance evaluations as some type of thing that affects profit sharing. That can be dangerous as different managers across a company might rate people differently. Basically, you should have A-players on your team, and if not, then they need to be let go in essence. If someone is performing at a subpar rate, then you need to be addressing that rather than essentially docking a bonus because there’s a lot of ways that this can backfire. Personally, I would not be including employee performance as a part of the criteria.
One drawback of profit sharing is that it’s really always taxed as income. It’s a big hit. If you’re talking about, you’re in the 33%, 35%, or 40% tax bracket, and you get a chunk every 3 months in essence, that’s a big difference versus if you were drawing out dividends. I guess through a C-corp, you’d pay double tax on it anyway. Or if you had a stock that you were able to sell, that long-term cap gains is a really big difference, and it can make a really big difference in the tax bill. But that is what it is.
Profit-sharing is cash. It’s a short-term motivator. I shouldn’t say short-term because it can motivate people over the long-term, but it really does allow employees to focus on not only growing the top line but potentially looking at reducing expenses, which the profit is obviously the revenue minus expenses.
I do think that a lot of folks in your company can impact the net profit that it has. If they’re thinking about their share of that, it does a pretty good job of aligning those incentives in a way that perhaps stock options are pretty nebulous.
Why is the stock worth more? Well, it’s typically worth more when someone buys the company or when you raise that next funding round. Is me saving $2000 a month on our AWS bill going to really impact the value of my stock options? It’s very unlikely versus profit sharing. You can see the money hit the Excel spreadsheet, the Google Doc, and you could see how it could literally trickle down to not only the company’s bottom line, but then to your own.
Some companies have folks vest into profit sharing or not be eligible for the first 6 or 12 months. I don’t think that’s unreasonable much in the same way that many companies have a waiting period to get on health insurance or to start a 401(k). This is another perk that makes sure the person’s a fit for the team, that the team is a fit for the person, and then evaluate getting them set up with all of the benefits.
These days, if I was going to evaluate these approaches for my own SaaS startup, I would think about whether I was going to be able to run it profitably. Obviously, profit sharing might be the choice then. Think about whether I was going to grow this and sell it, or have a liquidity event at some point. Then obviously, stock options might be a better opportunity.
Again, I think bonuses can be useful in the early days, but personally, they’re a little too arbitrary and can create a little bit too much chaos or just reinventing the wheel syndrome every year to personally be my favorite for having to run it long-term. And then equity, obviously, I mentioned, if it’s founder-level folks, then you can talk about that. But there are a lot of complexities there—taxable events, K-1s, and all that—that I don’t think scales to a full workforce.
Thanks again for joining me this week as I talked through different ways to incentivize your team members. If you have thoughts or comments on this episode, please give me a shout out on Twitter, @robwalling and @startupspod. I will talk to you again in your earbuds next Tuesday morning.
If you’re thinking about whether as a bootstrapped or mostly bootstrap startup founder, whether to set up a profit-sharing plan to offer stock options to do equity grants or to just pay bonuses or other ways to incentivize your team members, that’s what I’ll really be working through today.
First, I got a couple of the best podcast reviews I think we’ve ever had. The first one is from BrettxKelly via Apple Podcast, and he said, “Rob is the Chuck Norris of bootstrap founders. Thanks for all you do, Rob.” I really appreciate that, Bret. I appreciate the sentiment and the creativity of it.
The other one, the subject line is, “The podcast that changed my life. This podcast was instrumental in my journey from a blah day job to a successful tech founder. Rob and Mike for the first 450 episodes (or so) bring useful, actionable advice every week. I also really appreciate the honest delivery with none of the radio DJ sliminess that so many podcasts seem to embrace.”
Thank you so much for those reviews, and if you haven’t left us a five-star review in Apple podcast, Stitcher, Spotify, or wherever you partake of this show, I would really appreciate it because it definitely helps keep us motivated and it helps bring more listeners to the show.
Next, I wanted to mention hey.com. I’ve mentioned in the past that Basecamp is a headline partner with MicroConf and in partnership with MicroConf, I have had a few Basecamp ads on the show. We are switching those up, and are now for hey.com. If you’re listening to this podcast, you may have heard of it.
If you go to hey.com, you’ll essentially see that the folks at Basecamp have created an entirely new email service, and they say it’s “email’s new heyday. Email sucked for years. Not anymore — we fixed it. HEY’s fresh approach transforms email into something you want to use, not something you’re forced to deal with.”
Hey allows you to screen your emails like you screen calls. You can fix bad subject lines without busting threads, easily find your most important emails every time you log in. They have a built-in reply later workflow that was built from the ground up, and they block email tracking pixels among many, many other things.
I know many of you listeners are already using hey.com, but if you have not checked it out, head over to hey.com and you can try it free. Thanks to Basecamp and Hey for supporting independent startups, MicroConf, and Startups For The Rest of Us.
Let’s dive into our topic for today. As I said at the top of the show, I’m going to be talking through profit sharing, stock options, and equity. I touched on bonuses real quick just as a side note because it occurred to me as I was writing this outline that I should probably address that.
I had this conversation a bunch of times in the past three, four months, and have sent out a bunch of thoughts via email to folks. And I realized, if I just gathered those thoughts, put the bullets on paper, and talked it through that I can probably create, hopefully, an evergreen resource for folks who are thinking about motivating their team members.
I should be really clear that I’m not a lawyer, I’m not an accountant. Do not consider this legal tax advice or any kind of tax advice other than things I have learned from my own experience dealing with these types of incentive programs.
I’d also like to point out that I actually had a conversation with Dru from Trends.vc. If you haven’t checked out Trends.vc, Dru is putting out two reports a month on different trends he’s seeing in the startup space, the bootstrapping space, and he’s creating insightful reports and thoroughly thought out reports. I believe the reports are $20 each if you want to buy the paid version. Each one has a free version, or you can just subscribe for a nominal fee per year. I’m a premium subscriber.
He and I had a conversation a couple of weeks ago when he was preparing his report on profit sharing. If you haven’t checked that out, head to Trends.vc and you can pay a one-off $20 to read his report that’s focused on profit sharing. But today I’m going to be talking about profit sharing, stock options, equity, and touch a little bit on bonuses.
Let’s start with this first question of, I have one, five, ten team members. Why should I give them anything beyond just a salary or their hourly rate anyway? The idea is to align incentives. It’s to motivate people, not just by giving them amazing work to do every day, but to give them a financial incentive to really stick around.
Some people look at it as a retention incentive to not go elsewhere if they can do the same work and make more money. Others look at it as a way to make people just enjoy their jobs more or want to work a little harder and put in some extra hours because they feel like they can make a difference.
There’s a lot of different ways to do it, and of course, this is not a requirement. Giving bonuses or profit-sharing isn’t a requirement, but I personally feel like if your team is cohesive and is working hard to get the same end goal and you are creating profit, creating value, creating wealth. To me, it does feel right (in some way) to share that with your team members.
The first question of why not just give bonuses? Well, you can, and maybe in the early days, that’s something to think about. The big downside to that is oftentimes, bonus programs are pretty arbitrary. You’ve really just had to make a call and say you get a few thousand, here you get $5000, you get two weeks of pay at the end of the year or whatever.
It can feel a little squishy if you try to do this overtime for many years. People can feel like they get left out or they play favorites. Or if they talk among one another, they can feel like perhaps you’re giving more money to someone who doesn’t deserve it. You also don’t want to reinvent the wheel every year. You don’t want to have to reevaluate every year who gets how much bonus and why. As I said, it can feel or even be arbitrary.
In addition, there have been lawsuits from employees of companies where they’re given bonuses every year and they come to count on those bonuses as part of their income and the employees won. I believe this was in California many years ago, so even using the word bonus can be dangerous if you do it year in, year out.
If I were a brand new startup, I had one or two employees, and I wasn’t able to give a bonus one year or maybe two before I got something really structured in place, that’s probably okay. It’s a risk tolerance thing, but it can be dangerous long-term in terms of people to become reliant on it. And if there’s no formula (so to speak) of how to calculate that, which is what profit sharing and the others give you a formula or it’s a set thing that you don’t have to keep rethinking about and reinventing.
Lastly, bonuses are tough because incentives aren’t exactly aligned, are they? Something about profit sharing that’s nice is if the company doesn’t churn a profit that year, people don’t get the profit sharing. Whereas if a company doesn’t turn a profit and you don’t give bonuses, people can be really angry, and they can blame management or their owners. Or they can say it’s mismanagement, and you spent too much money on whatever thing that they don’t like. Therefore, we didn’t get bonuses because we didn’t get a profit.
Bonuses, I think, have a time and place. I think these days, profit sharing or stock options are actually probably better ways to go.
The second thing I want to touch on is equity, and I’m going through this almost in a reverse order of which I think you shouldn’t do. The reason equity is tough, meaning if you just give 1% of your company to the first employee or 3% to the CEO you bring in. Equity grants are not stock options. These are equity grants where you are literally giving a portion of the company. They are taxable on the current value of the company.
While that can be arbitrary, if you have a company—SaaS companies that are doing millions in revenue and you’re trying to give someone 1% of it, the IRS is not going to believe you when they file that the value of that 1% is $1000. You can have serious taxable events if you are given a substantial amount of equity or even an insubstantial amount (to be honest) if the company is large enough.
Now, I will say, if you run a services business, oftentimes—if you run an accounting firm or a legal firm—those can tend to have buy-ins, whereas you come up to become a partner, they value the business. They say, okay, you need to buy 5% or 10% of this business, and you have to buy-in that amount over the course of years. The partners are (in essence) taking that money out.
That’s not a taxable event for the person buying in, that’s different. It’s not an equity grant, that’s just buying into a business, and that is a model. Professional services usually use that model. I’m not talking about that, I’m talking about you’re running a SaaS company and you’re considering just granting equity to someone.
Aside from it being a taxable event based on the current value of the company. Assuming you are running a pass-through entity like an LLC in the United States, if you give someone equity, they now get a K-1 at the end of each year, which makes their taxes more complicated. And if they have never dealt with a K-1, they’re maybe going to want to hire an accountant to do it.
You can imagine this isn’t a big deal if it’s two founders of a company, but what if it’s 20 or 30 employees that you want to incentivize? You’ve suddenly complicated everyone’s taxes. That’s not an ideal outcome.
Another thing to think about is whether you are an LLC or a Corp, you need to have restricted units that vest over time. This would be, even with an equity grant, I wouldn’t tend to just give someone 1% or 3% right at the start. Typically, you have a four-year vesting period, and there’s an initial one-year cliff where they have to work for a year before they get any of the equity. And at that point, they get 25% and then vest it over the three years. That’s the most common approach. Obviously, talk to a lawyer to get specifics.
The interesting part about equity is it does make profit-sharing easy because if someone owns 5% equity and you take out a distribution, then they get 5% of that distribution. It’s simple. It’s tried and true. Equity has been around for hundreds and hundreds of years. It is simple in that respect, but honestly, there can be a danger too.
Let’s say you have an LLC. It makes $500,000 in profit that year, and you’ve given 1% equity to a key employee. Even if you haven’t’ pulled money out, it’s still in the LLC bank account. They get a K-1 for 1% of that $500,000, which will only be $500,000. But in essence, they would then have an income tax bill of $5,000 even though no money came out of it.
Equity makes things complicated. I’ll just put it that way. Know what you’re getting into. To me, equity is for founding employee type folks. If you have co-founders, you know what you are getting into. Straight equity with some vesting is something that a lot of us do. That’s how it’s normally done. But for employee incentives and aligning incentives, I don’t think personally it’s the best way to go.
One last note, if you hold equity for less than a year, it’s short term capital gains. And if you hold it longer for a year, then it’s long term capital gains. That’s one of the best parts of it is if you do have an exit, whether you sell your shares or whether the whole company gets acquired, you do get that nice capital gains treatment. Instead of essentially paying income tax levels on it, you pay 15% or 20%. There’s a much nicer basis there or there’s a much nicer tax outcome. Those are my thoughts on equity incentives.
Let’s move on to stock options, which are the standard Silicon Valley way to motivate folks above and beyond their salary. A stock option is just an option to purchase stock in the company. It’s a specific amount. You’ll say you have 10,000 options. It means you have an option to purchase 10,000 shares at a particular price called the strike price, and that’s set each year by a company’s filing with the IRS.
That strike price is usually quite a bit less than their last funding round. It doesn’t always wind up being that way, but what they say is, okay, you’re starting with us today. Here’s 10,000 options. You have to work for a year. […] Work a year, then you get $2500. And then each month after that, you get essentially 1/36 of the remaining amount up to four years. They typically give you another big chunk of options to keep you retained so you’re always working to just build that up.
A lot of folks don’t exercise their options. They just keep them around, and as long as you’re working at the company, you can just wait until there’s a liquidity event. Of course, the downside of that is paying short-term capital gains on it.
The good news about stock options is there are no capital gains to worry about. If you grant someone options, there’s no real value to them because essentially there’s an option to purchase at the price the company was worth when you’re given the option, so that’s not a taxable event. And they don’t receive a K-1 that complements their taxes, since they’re just an option to buy a share in the future.
It’s actually not owning equity, and there’s no profit sharing unless you would execute the option. They’re designed to payout if you have a liquidity event like going public or being acquired. I guess if you had options in an LLC, it wouldn’t be called stock because there’s no stock in an LLC but unit options, and then you exercise holding those. In theory, if the LLC took a dividend or distribution, you could get that. It’s a very uncommon scenario, and I don’t think people would typically go for that.
The other interesting thing about options is there’s usually this exercise window where if you leave the company and you haven’t exercised any of your options, you usually have about three months. And if you don’t buy the options, they just revert back to the company and you get nothing. I don’t really like that. I actually disagree with that. I don’t think it’s super ethical. I feel like that window should be much, much longer—one, two, three years—and there is a push for that to get longer because it kind of screws employees.
You think about an employee who comes in and they’re going to get 10,000 shares at a $2 strike price. That’s $20,000 worth of options. They work for the company for the full four years, and then they leave. They have this $20,000 that they could purchase. Maybe they don’t have that much in cash, or maybe it’s not a gamble that they can make at that time. But maybe the company sells or goes public a year or two later at $10 a share.
It’s a big gamble for some people to make, and I feel like having a longer time to evaluate that and a longer time to be able to purchase options feels to me like a better way to do it, a more fair way to do it.
The last thing before I tell you my own story about an experience with stock options is that if you exercise your options, you pay the money, then you own the stock in essence. Usually, it’s restricted stock, but it depends on if the company is private. It often has restrictions that you can’t sell it for a certain time.
But if the company is private, then you are typically just holding stock that you can’t sell. If they’re public, you can typically execute and then sell the same day or the same week. You then pay short-term capital gains on any gains that you get. You pay income tax. What I have heard about are folks who have enough money that they’ll exercise them. Hold them for a year, hope that the stock is still higher than when they exercise, and then you get long-term capital gains treatment on that.
My own story with stock options is back in probably about 15 years ago, I was a lead developer and a technical lead for an early prepaid credit card company in LA. We got options and I worked there—I got X thousand options granted, and I only stayed there for 2 years before I went out on my own.
I got half the options that were granted, and when I left, I had to make the decision within 60 or 90 days. Do I buy these? I did, I bought them all. I wound up spending under about $10,000, which is quite a bit of money for me at the time. I figured, hey, it’s a gamble. Maybe it’ll turn out.
Within a year or two of leaving, they raised another round of funding. They didn’t go public, but they allowed people who owned stock to sell a certain percentage of it. I don’t believe I sold any in that offering, but I did sell a little later for about half of it for 10X gain, and then another half for between 10X and 20X gain. It was several hundred thousand dollars, which was obviously really nice at that point in my life. We used a big chunk of it as a down payment on a house, then a chunk of it to fix the roof on the said house, and fix a bunch of other stuff that was broken. Don’t get me started on homeownership. But all in all, it was a good outcome.
If I had stuck around another 2 years I could have made double the money. But I’ve always thought, those were the years that I really cranked up on entrepreneurship. I started writing my book. I built the Micropreneur Academy. It was some early-day stuff. There were a lot of opportunity costs that probably wouldn’t have been worth it.
But my experience with stock options is that one experience. They did later go public, and I actually sold the last of my shares after they went public. My experience, of course, was positive. The reality is in almost all cases, there is no liquidity […]. Most startups fail. Most venture-funded startups fail, and so most venture-funded stock options really aren’t worth it. They just aren’t worth the money, aren’t worth the paper they’re printed on (so to speak).
That’s the reality of gambling on startups. We know that as founders. That it’s dangerous and that it comes with risk. I think it’s harder as an employee when you have so much less control over the company and over the success of it. But these are your choices that you have to make as an employee.
Now, as a founder, as a CEO, if you’re going the Silicon Valley route, you’re raising a big round of venture funding, and you’re doing the Delaware C-corp, stock options are the standard way. If you did anything else, people would look at you funny. I think with bootstrap startups, you can do this.
I think a big question is stock options typically aren’t worth much unless you plan to have a liquidity event, and that doesn’t mean sell or go public necessarily. You can sell shares on a secondary market. Future employees can buy them back. Founders can buy them. There can be some type of liquidity events that can happen. You could take just a minority investment even at some point if you wanted to provide liquidity for employees with a stock option pool.
The bottom line is most startups and most SaaS apps do sell at some point. The vast majority, they do sell within whatever timeframe we could define, 7-10 years. There are very few bootstrappers who are still running the same SaaS product that they were running 10 years ago. That is a reality to think about is there may likely be a liquidity event even if you don’t particularly plan on it today.
I think stock options are a reasonable choice. I hate to even make a recommendation for or against. I think they’re a longer-term play for sure because they do require that liquidity to be worth anything versus profit-sharing, which is more short-term cash out of the business type approach.
But frankly, if you’re not going to pull cash out of the business, if you’re in a high growth market—I think about when we were growing Drip—we weren’t pulling cash out of the business. If we had implemented profit sharing, people would have wanted us to become profitable. The goal at that point was not to be profitable yet, it was to keep growing. In that sense, I think a better motivating or incentive alignment would have been through the use of stock options, even though that can feel weird.
I think about an LLC having stock options, and it’s totally possible to set up a structure like that, but it can feel a little different than the typical C-corp setup. Again, I want to reiterate that not only am I not a lawyer or an accountant, but there are just a lot of pros and cons to these things. If there were one right answer, then everyone would choose to do that. It just depends on the situation and the specifics of the type of company you’re trying to build and how you’re building it. If it’s going to be profitable in the short-term versus long-term, and how you want to structure things for yourself.
Lastly, let’s talk about profit sharing. What’s nice about profit sharing is if you don’t ever plan on selling or having liquidity events, then money and profit distribution make sense. It’s what real businesses are built on. Real businesses sell real products to real customers. To me, again, it makes sense to share those in some form or fashion that the employees and the team members who are building that company with you get to share in some form or fashion.
One drawback to profit-sharing that you don’t see with the other approaches is that if an employee leaves, they don’t take the profit-sharing with them. It ends when their tenure with your company ends. It’s not like having equity or stock options where you can hold onto these things for a future gain. I left that credit card company two, three years before it went public. But I had that lasting piece of equity that I had exercised. It’s maybe not as ideal for employees who want to leave, which works as an incentive to keep them there but can also be a bummer for folks when they leave.
One thing I would think about if I were structuring profit sharing is to make it a pool, not a committed percentage to an individual. That’s a mistake you can make with an early employee is to say, oh, you get 1%, 2%, or 3% of profits. I would think more about, hey, let’s have a 10% profit sharing pool, and all key employees share in that, or all employees share in that.
Such that as you add more people, obviously, that first employee’s percentage of the whole chunk will go down. But ideally, the company should be growing, and these individuals should be contributing to that. If you’re going to do profit sharing, you probably want to stay away from being a C-corp because that’s going to give you double taxation, so you’re going to want to be in a pass-through entity.
Again, I mentioned Trends.vc at the top of the show, but there’s a really good report that Dru put together over there talking about the ins and outs of profit sharing. The best article I’ve ever seen written on profit sharing is from Peldi Guilizzoni. He wrote about the profit-sharing that he designed for Balsamiq. We’ll link that up in the show notes. But he basically said, they started off with a 10% pool—10% of the profits. I believe each quarter was distributed, and then he moved that to 15% at a certain point, years into the company. Now he’s up to 20%. I love that range right there. That feels really solid to me. To be honest, that 10%-15% stock option pool is also the standard size that a Silicon Valley startup would have.
That number does ring in that zone that I feel personally comfortable with. From Peldi’s article, one thing he talks about is they do quarterly distributions, which is probably what I would do if I was going to do it because if you do monthly, it’s too often. It’s just too much paperwork. If you do yearly, then people wait around and it’s bonus season. People will stay past that mark.
If they’re unhappy, they collect the profit sharing for the year, and then they take off. I don’t like that gap. It should be 3 or 6 months tops. But Peldi says, “Our quarterly bonus program allocates 20% of profits to full-time employees: 25% is split equally and 75% is split based on seniority, then it’s all weighed by the cost of living in each location.”
That’s how he structures it, and I do like that there’s a part split equally. There’s a part split by seniority. I have also heard of folks doing it based on the amount of salary people make, and then not having that cost of living of your location factor in because that’s already factored in.
One thing I would stay away from personally is using performance evaluations as some type of thing that affects profit sharing. That can be dangerous as different managers across a company might rate people differently. Basically, you should have A-players on your team, and if not, then they need to be let go in essence. If someone is performing at a subpar rate, then you need to be addressing that rather than essentially docking a bonus because there’s a lot of ways that this can backfire. Personally, I would not be including employee performance as a part of the criteria.
One drawback of profit sharing is that it’s really always taxed as income. It’s a big hit. If you’re talking about, you’re in the 33%, 35%, or 40% tax bracket, and you get a chunk every 3 months in essence, that’s a big difference versus if you were drawing out dividends. I guess through a C-corp, you’d pay double tax on it anyway. Or if you had a stock that you were able to sell, that long-term cap gains is a really big difference, and it can make a really big difference in the tax bill. But that is what it is.
Profit-sharing is cash. It’s a short-term motivator. I shouldn’t say short-term because it can motivate people over the long-term, but it really does allow employees to focus on not only growing the top line but potentially looking at reducing expenses, which the profit is obviously the revenue minus expenses.
I do think that a lot of folks in your company can impact the net profit that it has. If they’re thinking about their share of that, it does a pretty good job of aligning those incentives in a way that perhaps stock options are pretty nebulous.
Why is the stock worth more? Well, it’s typically worth more when someone buys the company or when you raise that next funding round. Is me saving $2000 a month on our AWS bill going to really impact the value of my stock options? It’s very unlikely versus profit sharing. You can see the money hit the Excel spreadsheet, the Google Doc, and you could see how it could literally trickle down to not only the company’s bottom line, but then to your own.
Some companies have folks vest into profit sharing or not be eligible for the first 6 or 12 months. I don’t think that’s unreasonable much in the same way that many companies have a waiting period to get on health insurance or to start a 401(k). This is another perk that makes sure the person’s a fit for the team, that the team is a fit for the person, and then evaluate getting them set up with all of the benefits.
These days, if I was going to evaluate these approaches for my own SaaS startup, I would think about whether I was going to be able to run it profitably. Obviously, profit sharing might be the choice then. Think about whether I was going to grow this and sell it, or have a liquidity event at some point. Then obviously, stock options might be a better opportunity.
Again, I think bonuses can be useful in the early days, but personally, they’re a little too arbitrary and can create a little bit too much chaos or just reinventing the wheel syndrome every year to personally be my favorite for having to run it long-term. And then equity, obviously, I mentioned, if it’s founder-level folks, then you can talk about that. But there are a lot of complexities there—taxable events, K-1s, and all that—that I don’t think scales to a full workforce.
Thanks again for joining me this week as I talked through different ways to incentivize your team members. If you have thoughts or comments on this episode, please give me a shout out on Twitter, @robwalling and @startupspod. I will talk to you again in your earbuds next Tuesday morning.
TinySeed Tales S2E6 | Best Growth Month Ever
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Brian & Scottie Elliott are the husband & wife co-founders of Gather, an interior design project management app.
On this episode, Brian and Scottie share with us an update on their unexpected MRR growth, the psychology of raising prices, and the difficulty of making decisions amidst a mountain of unknowns.
The topics we cover
01:07] Update on MRR growth since we last spoke
- Had a goal to grow a thousand dollars of MRR in a single month.
- Trailing 30 days is like $1,006.
- MRR is currently $8,200.
- Get caught up in the day to day to actually celebrate. Is good for us to stop and recognize that we have made a lot of progress.
- We’re still burning more cash than we’re making.
[03:53] Closing a large 20-person enterprise deal
- They did do a trial.
- Then they bumped up to an enterprise plan.
- You can have your sights set on a goal and before long you might achieve it. But that’s not the end of your journey. You’re onto the next hurdle.
- This is one of the things I’ve found so difficult about starting this kind of company, your to do list is never clear and things don’t end until you put someone in charge of the company or you sell it.
[05:47] Raising prices, again.
- We’ve even raised twice.
- Don’t get a lot of price objections.
- We have had to reject our previous customer avatar.
- Lower prices send a bad signal to them.
- The psychology of pricing, both at the founder level and also at the buyer level.
- This is a tried and true SaaS playbook. You start at the bottom of the market because you don’t have a brand and no one’s heard of you and your product is really early, and you don’t have the features that you need. You price yourself pretty low. You get a little bit of ttraction, use that to make a better product. You’ll find your positioning. You learn more about the market, and then you just go up, up, up from there.
- Lower price points, higher churn.
- A lot of people don’t realize product market fit is not just building a product that people want and are willing to pay for. It’s also having a good idea about your positioning and pricing and some idea of channels where you can reach future customers.
- You’re making a lot of decisions quickly with incomplete information and you only know which ones work in retrospect.
[12:21] Biggest wins so far and looking to the future
- In the beginning it felt a little bit scary and unknown when we were leaving, seeing the small teams.
- Biggest win: validating with these larger teams.
- Biggest win: we are selling into the kinds of firms that we hypothesized we could sell into.
- Doing these sales over the last couple of months has just taught me how to sell.
[15:33] Biggest fear right now
- That we’re going to run out of money.
- It’s scary to see the bank account dwindle.
- Just figuring out how we can keep going and keep growing and even accelerate growth.
- How are we going to cross this bridge? Because we can see the green pastures on the other side.
- Navigating a world that I don’t quite understand yet should be the title and subtitle and every subheading of being an entrepreneur.
- I’m most excited to see how we deal with this cash crunch that we’re heading into.
Links from the show
- Gather | Website
- Brian Elliott | Twitter
Thanks for listening to another episode of TinySeed Tales. If you haven’t already, be sure to check out Season 1 of TinySeed Tales where we follow the Saas journey with Craig Hewitt of Castos.
